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5
Government
PukWcations
ONTARIO
REPORT
of
THE ROYAL COMMISSION
APPOINTED TO INQUIRE INTO
THE FAILURE
of
ATLANTIC ACCEPTANCE CORPORATION
LIMITED
THE HON. S. H. S. HUGHES
VOLUME ONE
September 12, 1969
COMMISSIONER
COUNSEL
ASSISTANT COUNSEL
SECRETARY
REGISTRAR
FINANCIAL AND
AUDITING ADVISER
The Honourable S. H. S. Hughes
A. E. Shepherd, Q.C.
R. I. Cartwright
J. B. Lind, CD.
V. F. CUNNINGTON, CD.
J. A. Orr, F.C.A.
UBR^
\4t,
1 ~ 1970
*&*
*!JY OF TO^
N*
[Great Seal] ^^^ vj~^sQ<^4
J ONTARIO
PROVINCE OF ONTARIO
ELIZABETH THE SECOND, by the Grace of God of the United
Kingdom, Canada and Her other
Realms and Territories Queen, Head
of the Commonwealth, Defender of the
Faith.
TO THE HONOURABLE SAMUEL H. S. HUGHES, of Our Village of
Forest Hill, in Our Province of Ontario,
a Justice of Our Supreme Court of
Ontario and One of Our Counsel
learned in the Law,
GREETING:
WHEREAS in and by Chapter 323 of The Revised Statutes of
Ontario, 1960, entitled "The Public Inquiries Act", it is enacted that
whenever Our Lieutenant Governor in Council deems it expedient to
cause inquiry to be made concerning any matter connected with or
affecting the good government of Ontario or the conduct of any part
of the public business thereof or of the administration of justice therein
and such inquiry is not regulated by any special law, he may. by Com-
mission appoint one or more persons to conduct such inquiry and may
confer the power of summoning any person and requiring him to give
evidence on oath and to produce such documents and things as the
commissioner or commissioners deems requisite for the full investigation
of the matters into which he or they are appointed to examine;
AND WHEREAS Our Lieutenant Governor in Council of Our
Province of Ontario deems it expedient to cause inquiry to be made
concerning the matters hereinafter mentioned:
The Commission
NOW KNOW Ye that We, having and reposing full trust and con-
fidence in you the said Samuel H. S. Hughes DO HEREBY APPOINT
you to be Our Commissioner,
1. To investigate, inquire into and report upon,
(a) The events involved in and the causes of the recent failure of
Atlantic Acceptance Corporation Limited to meet the obligations
evidenced by its securities.
(b) The effect this failure has had on the money market in the Province
of Ontario and on the affairs of any person, company, corporation
or organization.
(c) The activities and conduct of any person, company, corporation or
organization in relation, whether direct or indirect, to such failure
and into the activities and conduct of any person, company, corpo-
ration or organization including British Mortgage & Trust Company
who is, was or claims to be a creditor, debtor or security holder of
Atlantic Acceptance Corporation Limited, or of any company,
corporation or organization which, in the opinion of you Our said
Commissioner, is or was a subsidiary of, or associated with, Atlanitc
Acceptance Corporation Limited.
(d) The existing legislation relating to loan and trust corporations and
to corporations engaged in the finance business and the money
market generally, and to consider what, if any, additional legislation
may be required in regard thereto.
2. To make such recommendations in regard to the above, as you Our
said Commissioner may deem fit, to the Lieutenant Governor iD
Council.
AND WE DO HEREBY CONFER on you, Our said Commis-
sioner, the power to summon any person and require him to give evidence
on oath and to produce such documents and things as you Our said
Commissioner deem requisite for the full investigation of the matters into
which you are appointed to examine.
AND WE DO HEREBY FURTHER ORDER that all Our depart-
ments, boards, commissions, agencies and committees shall assist you,
Our said Commissioner, to the fullest extent, and that in order to carry
out your duties and functions, you shall have the authority to engage
such counsel, research and other staff and technical advisers as you
deem proper.
iv
The Commission
TO HAVE, HOLD AND ENJOY the said Office and authority of
Commissioner for and during the pleasure of Our Lieutenant Governor
in Council for Our Province of Ontario.
IN TESTIMONY WHEREOF We have caused these Our Letters
to be made Patent, and the Great Seal of Our Province of Ontario to be
hereunto affixed.
WITNESS: THE HONOURABLE WILLIAM EARL ROWE, A Mem-
ber of Our Privy Council for Canada, Doctor of Laws,
Doctor of Social Science,
LIEUTENANT GOVERNOR OF OUR PROVINCE OF
ONTARIO.
at Our City of Toronto in Our said Province, this twelfth day of August
in the year of Our Lord one thousand nine hundred and sixty-five and in
the fourteenth year of Our Reign.
BY COMMAND
H. L. ROWNTREE,
Acting Provincial Secretary
And Minister of Citizenship
PRINTED AND BOUND IN CANADA
TO HIS HONOUR
THE LIEUTENANT GOVERNOR IN COUNCIL
May It Please Your Honour,
I, Samuel H. S. Hughes, appointed a Commissioner under the
Public Inquiries Act by Letters Patent issued pursuant to Order-
in-Council dated the twelfth day of August 1965 to investigate,
inquire into and report upon the failure of Atlantic Acceptance
Corporation Limited and other matters germane thereto:
Beg To Submit To Your Honour
My Report
CORRIGENDA
in
VOLUME ONE
Page i\, last line
For "223"
read "1 23"
^Tage 4, line 8
For "Atlantic's notes*'
read "Atlantic's senior notes"
Page 68. line 18
For "Talbot Acceptance Company"
read "Talbot Finance Company"
Page 79, line 16 and page 85, line 5
For "General Spray Services Inc."
read "General Spray Service Inc."
Page 99, lines 20-1
For "Daylite of Grand Bahama Limited"
read "Daylite of Grand Bahama Company Limited'
0
/
Page 107, line 44
For "Everest Office Machines Limited"
read "Everest Office Machine Company Limited'
Page 124, line 8
For "ACQUSITION"
read "ACQUISITION"
^Page 126, line 32
For "shares of debentures"
read "shares and debentures"
^Page 156, line 16
For "SI 00.000"
read "SI 0.000"
^age 366, line 29
For "Manhattan Sound West Corporation"
read "Manhattan West Sound Corporation"
L/i*age 407, lines 41-2
For "Everest Office Equipment Company Limited"
read "Everest Office Machine Company Limited"
Page 410, line 11
-"""For "Willson Stationery & Envelopes"
read "Willson Stationers & Envelopes"
7
age 449, line 6
For "Macpherson's"
read "MacPherson's"
gage 666, line 28
i/For "Bernard A. Thomson"
read "Bernard A. Thompson*
Summary of Contents
VOLUME 1
The Commission iii
Letter of Transmittal vii
Chapter I Default 1
Chapter II The Early Days 34
Chapter III Structure and Growth of the Atlantic Group 60
Chapter IV The Loss 92
Chapter V Three Acquisitions 106
1. Commodore Sales Acceptance Limited 106
2. Aurora Leasing Corporation Limited .... 146
3 . Adelaide Acceptance Limited 181
Chapter VI The John Belli Affair 189
Chapter VII The London Complex 208
Chapter VIII Commodore Business Machines and Associated
Companies 289
Chapter IX Lucayan Beach and Dalite 494
VOLUME 2
Chapter X The Hugo Oppenheim Bank 679
Chapter XI Racan Photo-Copy Corporation 738
Chapter XII The Nevil Group .... 791
Chapter XIII Valley Farm and Enterprises Limited 830
Chapter XIV Other Major Loans 860
Chapter XV British Mortgage & Trust Company 963
VOLUME 3
Chapter XVI The Deeds of Trust 1266
Chapter XVII The Riddle of the Accounts 1343
Chapter XVIII Motives and Methods of C. P. Morgan 1453
Chapter XIX The Effect of the Atlantic Failure on the Money
Market: The Abell Report 1520
Chapter XX Summary and Recommendations 1569
Acknowledgments 1691
Index 1697
Tables
Appendices
VOLUME 4
TABLES AND APPENDICES
IX
1
EDITORIAL NOTE
Throughout the text of the report footnotes are numbered
consecutively as they occur within each section under a sub-
heading so that at the commencement of a new subheaded
section the numbering reverts to number 1 in each case.
The tables referred to in the text will be found in the
volume entitled "Tables and Appendices". Generally speak-
ing the tables and the schedules contained in the text are both
in structure and form exactly as entered in evidence, but where
errors have been subsequently detected they have been corrected
and in some cases amendments have been made for the sake of
clarification.
It will be appreciated that the requirement to produce
daily copy of the transcripts of evidence has led to some varia-
tions from accepted spellings and textual aberrations of other
kinds. Wherever possible these have been submitted to the
shorthand reporter concerned for reconsideration of his notes
and the insertion of errata where necessary in the volumes of
evidence. In the few instances where obvious stenographic
errors have occurred, and have passed undetected in this pro-
cess, the necessary changes have been made, although no
alteration has been made of the sense of a passage or the
language used as transcribed.
Table of Contents
VOLUME 1
Chapter I
PAGE
DEFAULT 1
Lines of Credit 4
Royal Securities as Agent for S. F.C.I. 9
The Dishonoured Cheque 1 2
Action by the Trustee 17
Receivership 1 8
Public Anxiety and Government Action 22
The Royal Commission in Ontario 24
Chapter II
THE EARLY DAYS 34
C. P. Morgan 34
Incorporation, Directors and Officers 37
David Davidson 39
Problems of Profitability in the First Five Years 40
Early Financing 43
Two Chance Encounters: J. A. Medland and C. G. King
The Advent of Lambert & Co. 47
The Flying Tiger Deal 50
Lambert & Co. Quicken the Pace 52
Subsidiaries and Branch Offices, 1953-1958 54
The Horizons of 1959 56
The Climax: Long-term Lending by U.S. Steel Pension Fund
Chapter ffl
STRUCTURE AND GROWTH OF THE ATLANTIC GROUP 60
The Subsidiary Companies 60
The Financial Statements 63
Two Changes in Accounting Practice: Branch Offices and
Income Tax 68
Loan and Investment Position at June 17. 1965
1. Atlantic Acceptance Corporation Limited
2. Atlantic Finance Corporation Limited ^2
\i
Table of Contents
page
3. The Premier Finance Corporation Limited 72
4. Standard Discount Corporation Limited 73
5. Atlantic Acceptance (Toronto) Limited 74
6. Pay As You Study Plan Limited 74
7. Concourse Agencies Limited 74
Loan and Investment Position and Financial Statements of
Adelaide Street Subsidiaries 75
1. Commodore Sales Acceptance Limited 76
2. Commodore Factors Limited 78
3. Adelaide Acceptance Limited 80
Loan, Lease and Investment Position and Financial Statements
of Aurora Leasing Corporation 83
Sources of Atlantic Funds 86
Chapter IV
THE LOSS 92
Estimate of Montreal Trust Company 92
Evidence of J. G. Haxton 96
Estimate of Loss at March 10, 1966 100
Subsequent Reports of the Receiver and Manager 101
The Imponderables 103
A Conservative Estimate 1 04
Chapter V
THREE ACQUISITIONS 106
1. Commodore Sales Acceptance Limited 106
2. Aurora Leasing Corporation Limited 146
3. Adelaide Acceptance Limited 181
1
Jack Tramiel and Manfred Kapp 106
Annett & Co. Introduce C. P. Morgan 109
Incorporation and First Financing of Commodore Sales Accep-
tance 110
Evidence of John C. Laidlaw Ill
Commodore Portable Typewriter's Interest in Commodore
Sales Acceptance 112
Further Financing of Commodore Sales Acceptance 117
Decision of Atlantic to Acquire the Minority Interest 123
First Stage of Acquisition — Payment of $6 per Share of Com-
modore Sales Acceptance 125
xii
Volume 1
PAGE
Second Stage: Exchange of Atlantic Shares for Commodore
Sales Shares and Debentures 126
The Role of Netherlands Overseas Corporation Canada
Limited: J. R. Shemilt 128
Summary of Acquisition by Atlantic of Minority Interest in
Commodore Sales Acceptance 130
Profit and Complicity of the Directors and Others 131
Explanation to the Income Tax Authorities 134
2
C. P. Morgan Acquires Aurora Leasing Corporation 146
Carl M. Solomon 148
The Trio Account and Use of Commodore Sales Acceptance
Funds 149
W. G. Blacklock and Valley Music Company Limited 152
Walton Pays the Debts of Valley Music Company 154
Sale of Mavety Film Delivery to N.G.K. Investments 156
Early Financing of Aurora Leasing: The Solomon & Samuel
Trust Account 157
Distribution through the Trio Account 162
The Aurora Notes 163
The Trio and Valley Music Company's Aurora Notes 1 64
The Trio's Profit 167
Evidence of W. L. Walton 168
Wagman's Evidence on the Trio Account 171
Evidence of C. G. King 180
3
Crest Acceptance Corporation Limited 181
H. K. Cooper Approaches W. L. Walton 182
Atlantic Pays the Trio a 60% Profit 184
Chapter VI
THE JOHN BELLI AFFAIR 189
The Revival of "Angelo's" 189
Financing John Belli Operations Limited 190
Walton's Disbursement of the Atlantic Loan 192
The Aurora Leasing Loan 194
Departure of Belli and Hunter 195
Walton's Working Papers 197
Shemilt Buys out Morgan with an Aurora Loan 199
C. P. Morgan's Profit 203
xiii
Table of Contents
Chapter VII pAGE
THE LONDON COMPLEX 208
Donald Reid and the Kings 209
F. C. Adams and Frederick's Department Store 210
Reid and the Adelaide Acceptance Debenture 214
Adams' Report and Resignation 215
Further Advance of Atlantic Funds 218
Wildor Holdings Limited 219
Reid Applies for a Mortgage Loan to British Mortgage & Trust
Company 221
Reid's Evidence of the Payment to W. A. Pike 229
Further Evidence from David King 232
Bribes Admitted by Pike in Evidence 233
Reid Re-examined: His Counsel Cross-examines the Kings 238
Financial Difficulties of Wildor Holdings 239
British Mortgage & Trust Exercises its Power of Sale 24 1
Treasure Island Properties Lease to Treasure Island Gardens . 244
The End of Wildor Holdings 245
Marco Holdings' Profit of $9,400 and the Loan to Frederick's 248
N.G.K. Investments' "Loan" to Frederick's 250
Reid and Morgan as Partners 254
British Mortgage & Trust's "Atlantic Note" 257
W. P. Gregory's Knowledge of the Aurora Loan to Treasure
Island Properties 259
Morgan, Reid and Wagman Undeterred by Mounting Debt and
Losses 264
White Oaks Shopping Centre and South Wellington Properties 266
Proposal to the Shareholders of Frederick's Department Store . 270
The End of Frederick's 274
Reid Acts for British Mortgage & Trust: Loans to Samuel
Ciglen's Clients 275
Reid's Disbursements and Final Letter to Pike 277
London Lighthouse Investments Limited 279
The Deal with Great West Saddlery for Purchase of Atlantic's
Head Office Property 279
Position of British Mortgage & Trust Company 283
Delinquency of Donald W. Reid 287
Chapter VIII
COMMODORE BUSINESS MACHINES AND ASSOCIATED
COMPANIES 289
Transformation of Commodore Portable Typewriter Company 289
Structure of the Commodore Group of Companies 290
xiv
Volume 1
PAGE
Financial Statements and the Source of Funds 294
Loans from Commodore Sales Acceptance 295
Loans from Commodore Factors 297
The Investment of British Mortgage & Trust 298
The Price-Earnings Ratio of Common Shares 300
Directors and Officers 301
Early History of Common Share Transactions: The Purvin
Agreement 302
Morgan, Tramiel and Kapp Hold 25% of Commodore Portable
Typewriter 313
Identity of "Don Mills" 315
The Morgan, Tramiel and Kapp Shareholdings on the Eve of
the Public Issue 322
The Underwriting by Barrett, GoodfeUow & Co 323
The Streit Shares and Don Mills 325
Evidence of Distribution for the Canadian Stock Exchange 326
Evidence of Jeffreys, Knowles and Spanton 328
The Services of Irwin Singer 329
Evidence of Edward L. Stone 330
Evidence of Irwin Singer 332
Evidence of John R. Shemilt 336
Information Required by and Given to the Canadian Stock
Exchange 340
Appearance of Don Mills in the Commodore Business Machines
Prospectus 343
Commodore Industries Limited of Jamaica and the Quick
Adding Machine Rights 344
The Don Mills Shares 346
Associated Canadian Holdings Limited 349
The Five Wheels Transaction and its Reversal 351
Summary of the Events of July 10, 1963 353
The Dale Estate Underwriting 356
Manipulation of the Market for Commodore Business Machines
Shares: Distribution in Europe 361
Incidence of Trading on Canadian Stock Exchange 365
Associated Canadian Holdings' Agreement with its Shareholders 369
Frank Kaftel and I.F.A.S 373
Morgan's Visits to Kaftel in Paris 377
The Nature of Kaftel's Services 379
Information Available to Shareholders 386
Insider Trading Results: October 1964-May 1965 388
Cheques to "F. Kulunderino" 393
xv
Table of Contents
page
Convertible Debentures Series A, B and C 395
The Subordinated Note and Preference Share Issue of December
1964 399
Purchase of Trans Commercial Acceptance by Associated
Canadian Holdings 402
The Interposition of Trans Commercial Acceptance and
Baronet Associates Inc 404
Pearlsound Distributors and Humber Typewriters & Business
Equipment 407
Subsequent History of the Quick Adding Machine Rights 412
Analogue Controls Incorporated 419
Commodore Business Machines Inc. Acquires Shares in 1962 421
The Purchase of Control by Commodore Business Machines
(Canada) Limited in 1963 425
Commodore Business Machines Sale to Mortgage Trust &
Savings Corporation (Bahamas) Limited 427
Mortgage Trust & Savings Lays Off 75,000 Analogue Shares to
Manhattan Sound Corporation 429
The Cost to Mortgage Trust & Savings of its Purchase of
Analogue Shares 429
Intervention of George H. Weinrott 430
Inflation of Sales of Analogue Controls at October 31, 1964 436
New Directors of Analogue Controls: The Pharmaceutical
Experiment 446
David and Myer Rush 450
The Quickened Pace of Analogue Trading 451
N.G.K. Investments Supports the Market 454
Concern and Frustration of the Toronto Stock Exchange 457
The Pattern of Trading in Analogue Stock 458
Re-entrv of Frank Kaftel 461
Corrmlicity of R. A. Goodfellow 470
Sir Stafford Sands' Position 472
Results of Morgan's Trading 473
Concluding Observations on the Analogue Stock Manipulation 477
Commodore Business Machines Buys Willson Stationers 478
Tramiel's Use of 75,000 Atlantic Shares 481
The Atlantic Crisis and its Effect on Commodore Business
Machines 485
Irving Gould and the Sale of Willson Stationers 486
Sale of Willy Feiler and the Irish Operation to Litton Industries,
and Settlement with Victoria and Grey Trust Company and
Montreal Trust Company 490
xvi
Volume 1
Chapter IX pAGE
LUCAYAN BEACH AND DALITE 494
I
The Bahama Islands 494
Growth of Licensed Gambling 496
Report of the Commission of Inquiry into the Operation of
Casinos 497
L. A. Chesler and the Hotel Project 501
The Gambling Concession to Bahamas Amusements Limited 505
Sale of Lucayan Beach Hotel to the Manus Brothers 508
Allen Manus Turns to C. P. Morgan 511
Documents Illustrating the Commitment of Atlantic Funds 514
The Molly Corporation Underwriting 516
Financing of the Lucayan Beach Hotel Company 520
Five Wheels of Grand Bahama Limited 527
The Problem of Housing Hotel Employees: Daylite of Grand
Bahama Company Limited 528
The Motel and Convention Hall Contract 530
British Mortgage & Trust Finances the Subscription of Associ-
ated Canadian Holdings 533
Final Terms of Sale of Lucayan Beach Hotel: Opening and
Management Problems 536
Public Offering of the Lucayan Beach Hotel Company 542
Daylite of Grand Bahama Foots the Bill with Atlantic Funds . . 546
Masco Construction Company Limited 548
Morgan's Dilemma : The Displacement of Allen Manus 553
L.B.H. Management Limited and Baron von Rheden 558
Morgan's Scheme to Liquidate the Debt of Daylite of Grand
Bahama 561
Hugo Oppenheim und Sohn's Blank Cheques 563
Atlantic Acceptance in Receivership Finally Acquires Control 564
Concluding Reflections on Cost and Recovery 569
II
Dalite Corporation (Canada) Limited 571
Financing the Pre-fabricated Housing Venture :.. 573
C. P. Morgan's 25% of Dalite Corporation 575
Early Operations of Dalite Corporation Financed by Atlantic 580
Financial Record and Atlantic Loans 581
The Services of Dr. Keesing 583
The Trials of Cansameric Industries Limited 587
D.H.I. Limited and Count Mastino Delia Scala 588
Purchase and Re-sale of Cerametal Industries Limited 590
xvii
Table of Contents
page
D.H.I. Limited a Heavy Drain on Atlantic Funds 595
Final Figures for Dalite Corporation — 1964 and 1965 597
George H. Weinrott as Financial Adviser 599
The Incorporation of Cimcony of Canada Limited 60 1
Briardale Investments Limited and Ticonderoga Investments
Limited 603
Source and Disposition of Funds for the Weinrott Companies 604
Cimcony of Canada Buys an Atlantic Note 606
Weinrott and the Thompson Mortgages 607
Losses of Atlantic Funds and Weinrott's Apologia 612
Dalite Corporation Projects on Grand Bahama: Daylite of
Grand Bahama Company Limited 616
Financing of Daylite of Grand Bahama 619
The Accounting of Eugene Last 622
Inflated Billings as an Element of Dalite's Losses 628
Inflated Sales of Dalite Corporation and their Significance 637
Embellishment of "Aquila III" 639
The International Aviation Club 648
San Jose Construction (Bahamas) Limited 654
Daylite of Grand Bahama's Accounts at the Bank of Nova
Scotia, Toronto Branch 660
Morgan and Last Attempt a Final Settlement 664
The End of Dalite 672
An "Inappropriate Venture" 678
xviu
CHAPTER I
Default
On June 9, 1965. La Societe Financiere pour la Commerce et l'lndustrie
S. F.C.I. Limited, a private investment bank situated in Montreal and asso-
ciated with La Banque Nationale pour la Commerce et l'lndustrie B.N. C.I.
and La Banque d'Union Parisienne B.U.P. of Paris, acting through its
agent. Royal Securities Corporation Limited of Halifax and Montreal,
made its twelfth and final short-term loan to Atlantic Acceptance Corpor-
ation Limited of Oakville. Atlantic Acceptance, with over 130 acceptance
and small loans offices in every province of Canada except Quebec, and
with stated assets of over $150,000,000, was the sixth largest sales
finance company in Canada, and fourth among those not wholly-owned
by corporations in the United States.
All the twelve transactions in which S. F.C.I, was the lender and
Atlantic Acceptance the borrower, the first of which occurred on
December 11, 1964, were of a similar type and consisted of the lending
of large sums either over a weekend from Friday to Monday or for a
period of not more than six days, evidence of which were promissory
notes secured by a charge on certain assets of the borrower according
to the provisions of a deed of trust entered into on February 1. 1961
by Atlantic Acceptance and Montreal Trust Company as trustee, as
varied and extended by eleven subsequent trust deeds supplemental
thereto between the same parties.
The twelfth loan was of $5,000,000 at 45s cc from Friday. June 1 1
to Monday, June 14. On the Monday, Atlantic Acceptance issued in pay-
ment a cheque which was refused by the bank on which it was drawn
because there were insufficient funds on deposit. For a Canadian com-
pany of this size doing business in the field o( finance in times of
unexampled affluence, in respect of which no sign of instability had
1
Default
previously detected, and which had then debt outstanding in excess of
$130,000,000 owing to lenders which included institutions regarded as
the most shrewd and experienced investors in North America, suddenly to
default on a routine obligation was an event which astonished the finan-
cial world. From it flowed the collapse of Atlantic Acceptance and all its
subsidiaries, the bankruptcy of many companies dependent upon it, the
ruin of many lives and the searching re-examination of financial practices
and legislation of long standing.
The practice of raising money by the issue of secured promissory
notes is relatively new in Canada. Like so many of our financial expe-
dients it began in the United States although, for reasons which will be
considered in due course, the device of providing security by charging
assets in favour of a trustee has not flourished there and has been
subjected to some criticism here. None the less, since the last war
and beginning in the early 1950's, sales finance companies in particular
have resorted to it as a means of securing loans by pledging with
a trustee for the lenders the accounts receivable which constitute the bulk
of their assets. In principle this process does not differ from that of issuing
corporation bonds similarly secured and subject to the safeguards
provided by a trust deed, frequently described as a bond mortgage.
A greater flexibility in the terms of repayment and advantages inherent
in the operation of the money market have combined to make the issue
of notes of this type a favourite in the operations of finance companies
and have attracted in particular the interest of lenders with large amounts
of cash available for short-term investment. On the eve of its transaction
with S. F.C.I. Atlantic Acceptance had, in the categories of senior,
subordinated and junior subordinated debt, issued short, medium and
long-term notes to the face value of just over $1 28,000,000/ The
face value of short-term notes outstanding at the end of May was
$52,824,000, of which $16,453,000 were payable in American funds.2
Of these, excluding those given to secure bank loans, short-term notes in
the amount of $4,700,000 were payable on demand and others to the
face value of $19,102,400 were to mature between June 14 and June
25.3
A general observation on the organization of Atlantic Accept-
ance is here necessary in explanation of the events of this portion of the
month of June. In addition to conducting an instalment sales finance
business on its own account it was the parent company of a number
of subsidiaries. Of these Atlantic Finance Corporation Limited was
engaged in the business of making personal loans to members of the
public, a large proportion of which were under $1,500 and were
'Exhibit 786.
^Exhibit 589.
"Exhibit 591.
Chapter I
subject to the provisions of the Small Loans Act,4 a statute of the
Parliament of Canada. The two companies were operated from
the head office of Atlantic Acceptance at Oakville at a location
upon which the company had built a modern office building in
process of expansion; it was at Oakville that the far-flung acceptance
finance and personal loan business was conducted. Two other sub-
sidiaries had their head offices in Toronto; Standard Discount Corpor-
ation Limited which conducted a much smaller but profitable sales
finance business in "soft" goods, and Premier Finance Corporation Lim-
ited, the operations of which had been decidedly unprofitable and which
at this point had ceased lending in any systematic way. These two
companies had been acquired by Atlantic Acceptance, the former
in 1961, and the latter in 1959. Business of a different kind was
conducted from what were known as the "executive offices" of the
company at 100 Adelaide Street West in Toronto where Campbell Powell
Morgan, the president and general manager of Atlantic Acceptance,
habitually worked and from which he directed the operations of two
subsidiary companies, Commodore Sales Acceptance Limited, which was
in turn the parent of the wholly-owned Commodore Factors Limited,
and Adelaide Acceptance Limited. These three companies were
exclusively engaged in the fields of factoring and capital loans. Their
fortunes, as will be seen, were closer to the heart of C. P. Morgan than
any other part of the complex, and it was from the offices at 100 Adelaide
Street West that he and a small personal staff surveyed the money
market and pursued their delicate operations in it.
Immediately outside Morgan's private office at 100 Adelaide Street
West was an ante-room containing the desks of the treasurer of Atlantic
Acceptance, Barrie L. McFadden,5 and his assistant, David McGowan.
McFadden had been with the company since March of 1960, first as
assistant treasurer, and latterly since June of 1964, treasurer of the
parent company, as well as being assistant treasurer of Commodore Sales
Acceptance, Adelaide Acceptance and Premier Finance. Before this he
had been with the Toronto-Dominion Bank for ten years, finally as a
liability officer at the bank's head office. It was a measure of the pre-
occupations of his employer, and perhaps of all finance companies, that
McFadden's prime responsibility at this stage was borrowing money.
For this purpose he was in close touch with dealers in securities, and had
constantly under his eye the maturity dates of Atlantic Acceptance notes
and the interest rates of his competitors. Industrial Acceptance Corpor-
ation Limited and Traders Finance Corporation Limited were for him,
as for others borrowing short-term money, the bell-wethers of the
industry and Atlantic, for reasons which will become more apparent as
4R.S.C. 1952, c. 251.
5Evidence Volumes 6 and 89.
Default
this report proceeds, adopted the simple expedient of paying more inter-
est up to a quarter of a point and higher commissions to dealers (360
per annum per $100 as compared to 240 in the case of Industrial
Acceptance) than any other borrower of comparable stature.
Lines of Credit
Certain obstacles stood in the way of Atlantic's borrowing activities.
Much will be said later of the restraints imposed by the trust deed under
which all Atlantic's noteirwere issued. Although no legislation imposed
a limit on the borrowing of finance companies and adoption of the device
of issuing notes has largely emancipated these companies from their
former absolute dependence upon the banks, a practical restraint upon
borrowing is exerted by the "lines of credit" which the latter see fit to
allow them. Atlantic in 1965 had bank lines of $3,700,000 with the
Toronto-Dominion Bank, $2,000,000 with the Royal Bank of Canada
and $750,000 with the Bank of Nova Scotia, the last being in respect of
its subsidiary, Commodore Sales Acceptance Limited. For the purpose
of dealing with the events of mid- June, it is only necessary to consider
its relationship with the Toronto-Dominion Bank since it was with this
bank that Atlantic did its regular business in Toronto and Oakville
and which was the "lead" bank, to use the jargon of the trade. Under
provisions of the trust deed, the company had covenanted to main-
tain at all times a loan of $1,250,000 with the Toronto-Dominion
Bank apparently to assure to the noteholders the vigilance of this
institution. The Toronto-Dominion Bank lines had been increased in
December 1962 to $5,000,000, with the understanding that only
$3,000,000 would be normally used and the remainder left as a reserve
in case of emergency. As a result of the bank reviewing the company's
position in the spring and summer of 1963, this had been reduced to
$3,700,000, with the provision by the bank that only the $1,250,000
required by the trust deed would be regularly used. Atlantic concealed
this development from its noteholders whom it continued to inform, in
the supplementary information supplied to the trustee, and circulated to
them at the end of 1963 and 1964, that its line of credit with the
Toronto-Dominion Bank was $5,000,000.* McFadden certainly thought
that as a result of informal conversations with officers of the bank his
company was entitled to a "bulge" of $5,000,000 and could borrow up
to that amount without express authorization. Mr. A. E. Woods, at the
time assistant general manager for the Ontario division of the bank, in
his evidence before the Commission, said that he had protested verbally
to Morgan and McFadden when this misrepresentation of the line of
credit was brought to his attention, and on both occasions had been told
that they had always felt that the line of credit was confirmed at the
'Exhibits 92 and 97.
4
# /9//an/-|c's Senior flctc£
Chapter I
larger figure. As to the "bulge" this was a temporary affair, according to
Woods, and one which required special authorization by the bank's
officers in an emergency of short duration. The importance of this type
of bank accommodation, however slender it may appear in comparison
with a company's ability to borrow from the public and at large, con-
sists in enabling a borrower like Atlantic to meet individual maturities
and provide over short periods an overdraft for its extensive branch
operations. But in the early spring of 1965 a combination of pressures
was forcing Atlantic far beyond the normal use of its line of credit and
the bank into a mood of growing uneasiness.
Examination of the internal memoranda which surrounded the
bank's decision to cut back the line of credit from $5,000,000 to
$3,700,000 in 1963 shows that even in that year, and although the low
delinquency rate of Atlantic loans was considered wholly admirable, its
executive officers viewed the company's rapid growth with mixed feelings.
As custodian for the trustee, the bank was in a position to peruse the
notes of Atlantic and its subsidiaries which were lodged as accounts
receivable under the trust deed and in a letter of December 17, 1962
the then assistant general manager, Mr. E. R. Lawrence, had sought
Mr. Morgan's comment about seven loans which had been made by
Atlantic or its subsidiaries "covering the security and its value behind
the risks as well as the pay out period."2 Lawrence appears to have
been reassured but not to the extent of maintaining the $5,000,000
bank line. When the lower limit was finally decided on in August 1963
the general manager of the bank of that day observed that "this company
is expanding in a very aggressive fashion and we are looking forward to
receipt of the detailed analysis of their accounts at December 31st next
which should throw considerable light on the soundness or otherwise of
management's credit policies."3 C. P. Morgan none the less persisted and
in the spring of 1965 the bank was once again engaged in considering
an application for an increase to a limit of $5,000,000. By this time his
companies had passed through a period of unprecedented expansion in
the case of those assets represented by their accounts receivable and had
doubled the number of branch offices during the previous two-year
period. Now there was a cloud on the horizon which was causing concern
to the whole financial community in Canada. This was President
Johnson's appeal of February 10, 1965 to United States corporations to
support the American dollar in the current balance-of -payments crisis.
The "guide-lines" which the President provided included an injunction to
restrict lending to foreign borrowers with a view to making more
domestic funds available in the United States.
The extent to which the conditions prevailing in the money market
in the spring of 1965 affected Atlantic's ability to borrow is considered in
2Exhibit 595.
"Exhibit 596.
Default
detail in Chapter XIX, but it must here suffice to record the immediate
problems facing the company in the month of June. From the liability
ledgers of the Toronto-Dominion Bank4 it appears that Atlantic borrowing
from the bank remained within its line of credit during 1965 up until
March 16; then at the end of that day it reached $4,750,000. After some
fluctuation up and down it had by April 1 been reduced to the $1,250,000
required by the trust deed. Nothing unusual transpired until April 22 when
a liability of $4,250,000 was recorded. On the following day it was
down to $1,250,000 but on April 26 the level of $4,250,000 was again
reached. Thereafter the level of liability began to vary with increasing
irregularity. Two things should be borne in mind. On the one hand the
Toronto-Dominion Bank had been the principal bankers for Atlantic
Acceptance since its small beginnings in Hamilton in 1953. It was, as
might be expected, deeply concerned with its welfare. In an emergency,
and where borrowed funds were known to be on their way to the com-
pany's treasury in the course of a day or two, the bank's officers were
prepared to make an accommodation which might on the face of things
appear to be excessive. On the other hand there is no doubt about the
settled view taken by them that their line of credit was to be used
sparingly and, in the normal course, only to the extent of some 40% of its
authorized limit, so as to allow for the "fall-in" of short-term maturities
and moneys payable on demand. It should also be recognized that the
system by which the liability records of the bank were maintained pro-
vided that the highest debit balance of the day should be reported even
though it might be substantially reduced by deposits occurring later in
the same business period. Returning then to the day-to-day liability
situation, the records disclose that on April 28 it had risen to $7,750,-
000 but two days later had declined to $3,750,000. On May 3 the
figure rises to $8,750,000 and on May 6 to a peak of $9,250,000,
dropping again on the following day to $3,750,000.
Before this point was reached disquiet at the bank had led Woods
on April 30 to ask Morgan to come to his office for a discussion.
Morgan promised the utmost co-operation, undertaking to make no
more "wholesale" loans, to call in as many as possible as quickly as he
could, and to attempt to raise money by "mortgages against large loans."
It must be assumed from the tenor of Woods' evidence that on this occa-
sion it was the loans of Atlantic Acceptance rather than those of its
subsidiaries that were particularly discussed. The inference may be
supported by the action which Morgan subsequently took, as will be
seen. As a result of Woods' report of this discussion a more formal and
more searching conference was arranged by the deputy general man-
ager of the bank, Mr. E. R. Lawrence, on May 14, the day after
Atlantic's liability to the bank had reached a high point of $9,500,000.
4Exhibit 599.
Chapter I
According to Lawrence's notes,3 Morgan was accompanied by McFad-
den. C. R. Sherrill, his senior vice-president, and two vice-presidents in
charge of the acceptance and small loans business and the company's
comptroller. Lawrence and Woods represented the bank.
Lawrence's notes of this meeting may be quoted with advantage:
"A general discussion ensued as to the immediate problems facing
Atlantic and Mr. Morgan explained that the roof had literally caved in
as regards the availability of short-term funds at the present time and
he stressed that the main reason for their tight position now was because
of the Johnson edict regarding defence of the U.S.A. dollar. Mr.
Lawrence probed him as to why they should be caught in just such a
position and he went on to explain that Bank lines of credit for a finance
company should not be utilized to the full extent but more or less kept
as a reserve for contingencies and that normal expectations would be
such that they would only utilize say 60% of available lines. Mr.
Morgan went on to say that as far back as last January they had been
assured of ample funds from the United States and it was hinted that
our own participation should now be much greater for Atlantic in view
of their substantial growth in assets however Mr. Lawrence and Mr.
Woods explained that we have been holding the line with finance com-
panies now for the past few years and that this feature was well known
to them. It was intimated by Mr. Morgan and Mr. McFadden that part
of their problem was that they did not have large enough lines of credit
from the various Banks. Mr. Morgan assured us that everything possible
was being done to ease the strain of Atlantic's financing and in turn upon
our own position and he had just returned from New York where
negotiations had been instituted for the raising of monies.
. . . Mr. Morgan reiterated that outside of a complete curtailment of
new business they were doing everything possible to raise monies from
any available source and the reason that he brought the other officers
with him was in order that they would be acquainted with the serious-
ness of the situation. Mr. Lawrence made it quite clear that we were
not happy with their present position which has placed the strain of their
financing upon us and he stressed that we could not make any commit-
ment regarding the future rather that we would just have to go along on
a day-to-day basis and most certainly we did not wish to go above our
present level of $6/7,000,000 rather we would like to see loans
reduced to line just as quickly as possible. Mr. Morgan understands
that they must solve their own problems and certainly we regard the
whole matter most seriously and he was informed that there were times
when we actually wondered whether we could see him through for any
given day."
To these notes Woods appended the following remarks on May 17:
"Mr. Morgan appears to be doing everything short of notifying the
company's branches to stop buying paper, which would be tantamount
to closing the operations down. He is satisfied he will have our advance
"Exhibit 601.
Default
in line within 45 days or sooner. Mr. Lawrence advised him no encour-
agement could be given that we would carry on other than on a day-to-
day basis."
For the rest of the month of May Atlantic's liability to the Toronto-
Dominion Bank declined as new funds became available. Then a sharp
rise occurred at the beginning of June and by June 7 it had risen to
$8,250,000. At this point some relief was provided by a transaction first
suggested by Belgian interests who were willing to advance a substantial
sum to the company, provided that they received a deposit receipt from
a chartered bank and secured the bank's obligation to pay ahead of
Atlantic's. In effect this proposal would have involved a second step
whereby the bank in question would have lent the money to Atlantic
in its turn for a fraction of the total interest paid by the latter, and
upon consideration the Toronto-Dominion Bank decided to advance
$4,000,000 United States funds from its International Department in
New York in exchange for an Atlantic note undertaking to pay interest
at 7%, the bank in fact requiring payment of interest at 6% only.
This loan was for a period of 120 days and was completed on June 9.
As a result, on June 10 the bank's demand loans had been reduced to
$4,250,000.
The result of the ultimatum of March 14 was an intensification of
the search by Morgan for long-term funds in the United States and
Europe and an attempt by the officers in charge at Oakville to curtail
Atlantic's lending still further. No relief, however, was felt by Mc-
Fadden in his daily pursuit of short-term money for which he was now
almost wholly dependent upon Canadian sources and lenders of which
like S. F.C.I, were proving a godsend in a situation where American
short-term funds had fallen to about 23% of the total outstanding
on the previous March 15. This date had a special significance, as
had all the quarterly dates corresponding to it, for borrowers of these
funds from sources in the United States, because it was on these days that
American lenders had to make their periodic payments to the United
States revenue authorities and consequently a disproportionately high
number of maturities then occurred. The rising disinclination of Amer-
ican lenders to "roll over" or renew their short-term loans at maturity
because of the presidential "guide-lines", coupled with their requirement
of liquidity on tax dates, made June 15, 1965 a day of crisis. It will be
appreciated then that on Wednesday, June 9, the day for arranging
short-term loans over the following week-end, Atlantic was relying heavily
on the expected accommodation from S. F.C.I. Although the general
practice was to conclude these accommodations for week-end loans before
noon on Wednesday, Atlantic was still in the market at noon and was
prepared to take all of the funds available at almost any conventional
rate.
8
Chapter I
Royal Securities as Agent for S.F.C.I.
Since December of the previous year S.F.C.I.'s agent in the placing
of short-term loans with Atlantic had been Royal Securities Corporation.
The word "agent" is used advisedly because at the time of writing the
Supreme Court of Ontario has declared this to have been the case, con-
trary to the contentions made ex post facto by Royal Securities. In Royal
Securities Corporation Limited v. Montreal Trust Company et al1 an
action begun on July 20, the Chief Justice of the High Court, the
Honourable G. A. Gale, giving judgment in October 1966 lucidly
describes the position of Royal Securities in the transaction in the fol-
lowing words:
"At this point it is important to note the reason for Royal's complicity
in these loan transactions between S.F.C.I. and Atlantic. S.F.C.I. had no
office in Toronto and Atlantic had no office in Montreal. Under these
circumstances, it was virtually impossible for S.F.C.I. to transfer monies
from Montreal to Toronto on a Friday and for Atlantic to transfer
monies from Toronto to Montreal on the following Monday. And even if
that had been possible, the cost would have made the whole transaction
unprofitable.
Royal, however, had offices in both Montreal and Toronto, with bank-
ing facilities at each location. Thus, once Royal had been put in funds
in Montreal, it was a simple matter for the Toronto office of Royal to
draw a cheque on the Montreal branch of its banker and to deposit that
cheque in the Toronto branch of its banker. Royal in Montreal could
receive funds from S.F.C.I. early on a Friday, deposit those funds in its
Montreal bank, and advise its Toronto office that funds were available.
Toronto could then draw a cheque on the Montreal branch of its banker,
deposit that cheque in the Toronto branch of its banker and draw
cheques thereon payable to Atlantic in Toronto a short time later that
same day. A similar procedure would be available on the following
Monday for transferring funds paid by Atlantic in Toronto, from
Toronto to Montreal, making it possible for Royal to repay S.F.C.I. in
Montreal.
The most important of these transactions, for the purposes of this
action, began taking shape on Wednesday, June 9, 1965. Ray side
(assistant money market trader for Royal Securities in Montreal)
testified that prior to noon of that day, he conversed with Simard in the
Toronto office by telephone. Simard advised Rayside of the names of
potential borrowers for that week-end and of the rates they were pre-
pared to pay. Included among these names was Atlantic. Rayside then
called the offices of S.F.C.I. and spoke with Mr. John Carroll who had
just joined S.F.C.I. on June 1, 1965, after some years with other
financial houses. In testifying as to this conversation, Rayside could
not be certain that he informed Carroll of potential borrowers other than
Atlantic. The reason advanced by Rayside was that he would likely not
J(1967) 1 O.R. 137. The text quoted is, however, that released by the Chief Justice and
not as subsequently published with editorial changes in the Ontario Reports.
Default
advise Carroll of borrowers who were willing to pay a rate of interest
which he, Rayside, knew S. F.C.I, would not accept. Rayside also stated
that at the time of this conversation, approximately 12.15 p.m., Atlantic
was probably the only borrower still looking for week-end money, it
being normal for week-end borrowers to have completed their trans-
actions by the noon hour of that day.
In any event, Rayside informed Carroll that Atlantic was in the
market for week-end funds. Carroll replied that S. F.C.I, would consider
lending Atlantic up to five million dollars at four and three-quarters
per cent per annum for the coming week-end and agreed to be 'firm' on
that proposal for ten minutes. As I understand it, this meant that the
offer would be open for ten minutes. Rayside then called Simard in
Toronto but was told that Simard had left for lunch. He then called
Atlantic directly and was advised by an official of that company that it
would pay four and three-quarters per cent interest if the loan were for
six days, otherwise its maximum rate was four and five-eighths per cent.
Leaving the line to Atlantic open, Rayside contacted Carroll at S.F.C.I.
and advised him of Atlantic's proposal. Carroll then requested Rayside
to proceed with a loan of five million dollars to Atlantic, at four and
five-eighths per cent, for the week-end only, and Rayside confirmed this
acceptance with Atlantic on the other line, asking them to prepare the
necessary promissory note and to have it registered in the name of
S.F.C.I. Finally, Rayside confirmed all matters with Carroll and wrote
up his work sheet.
The preliminaries of the transaction were thus completed and it
remained then to consummate the agreement. I might add, at this point,
that there was little said in any of the conversations concerning the
amount of money to be borrowed by Atlantic. Apart from Carroll's
suggestion that S.F.C.I. would be prepared to lend up to five million
dollars, it seems to have been taken for granted that Atlantic would take
the maximum available. This is consistent with much of the evidence
which indicated that Atlantic was in considerable need of funds at that
time and for this reason was paying a higher rate of interest than
other similar borrowers. I was told by Simard that on the morning
of Wednesday, June 9, 1965, when he called Atlantic to determine
whether or not it would be seeking week-end funds, he was told by a
Mr. McGowan of Atlantic, 'Yes, we'll take all we can get'."
The italicized words in brackets do not occur in the Chief Justice's
judgment at this point and are inserted. It may be noted parenthetically
that Royal Securities some time before December 1964 had refused to
participate any further as fiscal agent for Atlantic in the sale of its
securities to the public.2
Upon receipt of the $5,000,000 from S.F.C.I., Atlantic brought its
demand loan position at the Toronto-Dominion Bank, already reduced
by deposit of the 120-day $4,000,000 loan, down to the $1,250,000
minimum liability required under the trust deed by payment of $3,000,-
2Evidence of D. Davidson, Volume 79.
10
Chapter I
000. The balance of $2,000,000 was, in turn, invested with Dominion
Securities Corporation over the same week-end, the bank's $4,000,000
not being repayable before the expiry of its 120-day term. On Monday,
June 14, the situation was this: Atlantic was faced with maturities
of $7,400,000 that day, including S.F.C.I.'s $5,000,000 and excluding
interest, to meet which was the $2,000,000 returning from Dominion
Securities and $900,000 representing the proceeds of additional notes
sold, leaving a balance to be found on the day's operations of $4,500,-
000. McFadden, providing for an additional $500,000 to allow for
possible overdrawing by the company's one hundred and thirty branches
across Canada, informed the bank shortly after 1 1 a.m. that he would
need $5,000,000 to transact the day's business. Williams, the super-
visor in charge of Atlantic's affairs in the bank, asked McFadden to keep
him advised as to the amount of new short-term money obtained during
the day and the latter turned to the detail of repaying S.F.C.I. Although
the normal procedure was for Atlantic to deliver cheques to lenders
between 2.00 p.m. and 3.00 p.m., the arrangement with Royal Securities
in the handling of S.F.C.I. loans was for the latter to ask for its cheque
at about 11.00 a.m., to be picked up by its own messenger shortly after
noon. As a result, on this occasion the matured note which the messenger
delivered thus early to Atlantic's office was taken over to that of the
Montreal Trust Company between 2.00 and 2.30 p.m., when Atlantic's
messenger in the normal course presented the new notes for the day for
authentication by the trustee. Had it not been for this unusual arrange-
ment, apparently customary in the case of Royal Securities' handling of
S.F.C.I.'s loans to Atlantic, Atlantic's note, which was then cancelled
by perforation, could not have been so treated until the following day.
While this routine business was being transacted at the trustee's office
Williams called McFadden to enquire about success in obtaining addi-
tional funds. He expressed concern when McFadden told him that there
were none, said that he was in search of the assistant general manager
to obtain approval for the required advance, and, according to Mc-
Fadden, told him to deliver up a cheque to Royal Securities for S.F.C.I.;
whereupon McFadden replied that this had been done at noon.
It is useful to return here to the authoritative account given by
Chief Justice Gale:
"On Monday, June 14, a messenger from Royal in Toronto attended
at the Toronto office of Atlantic with the promissory note for five million
dollars. In return for the promissory note, he was given Atlantic's
uncertified cheque for $5,001,900.69, being the amount of the loan plus
interest. The witness, Maurice P. Henderson, who was the Assistant
Office Manager for Royal in Toronto, testified that the messenger arrived
back at the Royal office around noon with the cheque. He stated further
that no instructions had been given to the messenger to insist that
Atlantic's cheque be certified, and he was not instructed to attend at
11
Default
Atlantic's bank to have the cheque certified. Henderson then instructed
George Cosgrove, who was the cage clerk for Royal in Toronto, to
deposit the cheque and to advise the Montreal office when it had been
deposited. Cosgrove testified that he called Edward T. Hollingsworth in
Montreal, advising him that the cheque had been received, and that once
it had been deposited, he would send a wire to him, Hollingsworth,
describing the cash position and the exact time when a draw could
be made in Montreal. Exhibit 30 was the Telex message which was
received in Montreal at 2.00 p.m. and it read as follows:
T TO TOR TO VAN
BRDA SV2 V/s BID 25
TORx
TOR TO TED MTL JUNE 14 100
CASH SURPLUS TODAY 5500M. YOU MAY DRAW AT 2.00
P.M. BNC TOR'
Cosgrove explained that the reason for the delay in depositing the cheque
was that he was unable to obtain the services of a messenger at an earlier
time.
Once Hollingsworth received the Telex message, he immediately drew
a cheque on the Toronto branch of Royal's banker intending to have this
cheque deposited with its Montreal banker. The total amount of the
cheque was five and one half million dollars, the excess being required
to meet obligations with respect to another transaction. Hollingsworth
then prepared a cheque drawn on Royal's bank in Montreal, in favour
of S. F.C.I. , in the amount of $5,001,900.69. This, of course, was the
exact amount of the cheque given by Atlantic in Toronto in return for
the promissory note.
A messenger was then instructed to deliver this cheque (Exhibit 38)
to the offices of S.F.C.I. and to deposit their draw on its Toronto branch,
in order to cover the amount of Exhibit 38. Both of these operations
were duly performed."
One may observe in passing that the Chief Justice was not appar-
ently given the same explanation as to departure from the normal
practice in providing payment for maturing notes as McFadden offered
to the Commission but, other than the fact that an exchange of cheque
and note occurred earlier in the day than usual in Atlantic's dealings
with S.F.C.I. through Royal Securities as a matter of practice, no other
explanation has been forthcoming.
The Dishonoured Cheque
At ten minutes to five on Monday afternoon McFadden received a
telephone message from the Toronto-Dominion Bank saying that Atlan-
tic's cheque to Royal Securities had been returned. He spent the next
hour trying to reach C. P. Morgan and eventually did by telephone in
New York at 6.00 p.m. Morgan said that he would take the next
aeroplane to Toronto. McFadden then called Atlantic's solicitors,
12
Chapter I
Messrs. Osier, Hoskin & Harcourt, advising them of the return of the
cheque and expressing the view that this constituted default under the
terms of the trust deed.
Early on Tuesday, June 15, there was, as one might expect, a
meeting at the offices of the Montreal Trust Company attended by
Morgan and McFadden with the company's solicitors and officers of the
trust company, now faced as trustee with the dire discretionary decision
as to whether all Atlantic senior and subordinated debt should become
immediately due and payable, to give anxious consideration to the next
step. To illustrate the company's dilemma and that of the Toronto-
Dominion Bank there are quoted below excerpts from the evidence given
by McFadden and A. E. Woods in answer to questions put by counsel
to the Commission, Mr. A. E. Shepherd, Q.C., which can hardly be
improved upon by any digested narrative. They were examined on
March 8, 1966. First, McFadden:1
"MR. SHEPHERD:
Q. Before dealing with the events of this day, did you deposit your
$2,900,000?
A. Yes, sir.
Q. And had you written cheques to a number of noteholders other than
Royal Securities or S.F.C.I.?
A. Yes, there was a total of about $7,400,000.
Q. Of which $5,000,000 was S.F.C.I.?
A. Yes.
Q. As soon as you deposited $2,900,000, do I take it that there wc-re
funds in the account to meet the other cheques which were coming in?
A. That is correct.
Q. And were they paid in the ordinary course?
A. I believe they were all paid but one small one of $ 10,000.
Q. But the S.F.C.I. cheque was for $5,000,000, and there were not
funds in the account to meet that cheque?
A. Correct.
Q. If the bank had agreed to meet the S.F.C.I. cheques, would the effect
have been that you would have owed the bank about $10,250,000 on
that day?
A. That is correct.
Q. And the maturities were coming in on the next day?
A. I thought the figure was around $8,000,000. I believe it was six,
somewhere between six and eight million dollars maturities on the 15th.
'Evidence Volume 6, pp. 635-40.
12
Default
Q. The documents already admitted in evidence refer only to short term
notes, don't they?
A. That is correct.
Q. Of course, there may have been medium term notes falling due as
well?
A. Yes, sir.
Q. So there was something between six and eight million dollars that
was going to fall in the next day?
A. Right.
Q. Was any portion of that American funds?
A. Yes, I believe three to four million dollars.
Q. Did you have any assurance that those funds would simply be loaned
back to you again on that day?
A. No, I didn't.
Q. So, if that money came due the next day and were not renewed, then
you would owe the bank something in the order of seventeen to eighteen
million dollars, less whatever new moneys you would have been able to
get in on the day following?
A. That is correct.
Q. Is normally an effort made to prevent notes in aggregate sums such
as these from falling in on one day?
A. Yes, it is ideal to have maturities strung out on an equal basis, if
possible, so you are not faced with large sums on any given day.
Q. What steps had you taken to prevent from occurring precisely that
which occurred, of very large sums falling in on two days, one after the
other?
A. I had endeavoured to place the maturities equally, but because of
our demand for funds we were basically in a position where we had to
take all funds that were offered to us, regardless of maturity.
Q. Is it fair to say the company needed money very much and was in
no position to bargain, so far as maturities are concerned?
A. That is correct.
Q. You took what was offered?
A. Right.
Q. What happened on the next day, the 15th of June?
A. There was a meeting held at the Montreal Trust Company. I believe
— I can't recall who was there from the company, but myself and Mr.
Morgan and our company lawyer, Montreal Trust Company. There was
discussion on what could be done to overcome this technical default. I
wasn't at the meeting for the whole period of time. I had to go back to
the office and advise dealers on the remaining notes that were maturing
on the 15th.
14
Chapter I
Q. Apart from the ten and a quarter million you would have needed on
the 14th from the bank sums ranging up towards $8,000,000, depending
on the availability of money the next day. Was there any other money
you felt would fall due on that next day, as a result of the default on the
Royal note?
A. As a result of the default, yes, I would say there was eight to ten
million dollars in demand, that once the investment dealers were aware
we were in default, they could demand on those funds. In fact, I believe
the trust deed automatically makes all notes, regardless of maturity,
demand instruments once a default occurs.
Q. But the funds, I take it, which would have been required to repair
the damage on the 15th, so that default was cured, would be the
$ 10,000,000-odd which you needed on the 14th, and sums ranging up
towards $7,000,000 due on the 15th, and probably all the money which
was out and payable on demand, according to the tenor of the note?
A. I would say at least $25,000,000 would be required on the Tuesday.
Q. To keep it alive, Atlantic would have had to be able to raise about
$25,000,000 on Tuesday?
A. Right.
Q. How many investment dealers did you have to phone?
A. I believe that we had outstanding maturities with about ten dealers.
Q. You were calling them for what purpose?
A. To advise the notes, which they were agents on, maturing that day
were not going to be paid. I called two or three and it wasn't necessary
to call the remainder.
Q. For the record, why was it not necessary to call the remainder?
A. They have inter-phones to each other, and it was a matter of flicking
a key and everybody knew after the first two or three phone calls.
Q. The word leaked out, I take it?
A. Yes, sir."
Then Woods,2 dealing with the same events, also provided information
as to banking practice which explains the decisive part played by the
final transaction of Atlantic with S.F.C.I.:
"Q. Were you present on the 14th of June when Mr. McFadden has
described the events which occurred?
A. No, I wasn't, sir, but I am familiar with the events.
Q. You have informed yourself as to the matters which caused the bank
to take the action which it did?
A. Yes, sir.
'Evidence Volume 6, pp. 699-704.
15
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Q. Why did the bank refuse to honour the $5 million cheque, taking
the loan to $10,250,000?
A. Well, ten million would be much too high and, on top of that, there
was approximately six million nine (hundred thousand) to fall in the
next day in street money and two million the following day. In all we
would have been looking at probably 19 or 20 million dollars by the
17th or something like that.
Q. You did have that information available to you, I take it, because
you have received the lists of maturities?
A. That is right.
Q. So, do you say the situation was that the bank knew the following
day approximately $7 million was going to fall due?
A. Yes, sir.
Q. And the day after that something in excess of another $2 million
was going to fall due so the bank, by the 16th, would be owed between
19 and 20 millions, less any amount which the company had been able
to raise on the street in the meantime?
A. Yes, sir.
Q. Was there any indication or any assurance that any of the debts due
on the 15th of June were going to be rolled over, I believe is the phrase?
A. I don't think you could ever have any assurance to that effect."
"Q. Evidence has been given this morning, Mr. Woods, that the com-
pany deposited on the 14th of June $2 million plus some interest from
Dominion Securities and other amounts totalling approximately
$400,000. Do these ledger cards suggest a deposit in that aggregate
amount was, in fact, made?
A. On what date?
Q. On the 14th of June.
A. $2,010,000.
Q. In one cheque?
A. Yes.
Q. And there are certain other cheques, as well?
A. That is right.
Q. Totalling approximately $2,400,000 in round figures, would it be?
A. That is correct, sir.
Q. Leaving the bank with a credit balance of $1,984,300.11 at the
moment that the deposit was made. Is that correct?
A. Yes, sir.
Q. What did the bank do with that money?
A. Well, continued to pay cheques that were presented to them.
16
Chapter I
Q. Is it fair to say, and does it appear on these cards, that the bank
paid every cheque presented to it on the 14th and 15th of June for
which it had funds on hand?
A. Yes, sir.
Q. And at the end of the day, on the 15th of June, there was remaining
a balance of $40,342.61?
A. Yes, sir.
Q. Did the bank seek to take any of the funds that were in the account
of the company and apply them against the indebtedness of the company
to the bank?
A. No, sir.
Q. How much is owing to the bank now in respect to the notes?
A. Four million U.S. dollars and one million 250 thousand Canadian
dollars.
Q. One last question, Mr. Woods. I would just like to understand
banking practice. If you have a sum of money at credit for a client in
the bank and someone arrives with a cheque which he presents which
is over the amount, larger than the amount then at credit, that cheque
may be refused. Is that correct?
A. Yes, sir, that is correct.
Q. But it may be that even later on someone else will come with a
smaller cheque and that cheque is within the amounts of money at
credit, so that cheque is paid, is that correct?
A. That is right."
The apparent discrepancy between the amount of the deposit of
$2,900,000 referred to by McFadden and the $2,400,000, approximately,
deposited on June 14 referred to by Woods is explained thus. $5,900,-
000 was deposited on June 11, being the Friday before the week-end,
of which $3,000,000 was used to reduce the liability to the bank and
$2,000,000 was invested with Dominion Securities Corporation. The
$2,400,000 referred to by Woods represents the recovery of $2,000,000
plus interest from Dominion Securities and the proceeds of additional
notes issued on June 14, the Monday following the week-end.3
Action by the Trustee
The dilemma of the trustee was no less acute. It was described
to the Commission by James Gordon Haxton, vice-president of the
Montreal Trust Company,1 who was out of the country on vacation
during the week in question but was fully possessed of the detailed
accounts given to him by his subordinates. In the course of discussion on
"Exhibit 604.
'Evidence Volume 7.
17
Default
the Tuesday morning Morgan told the officers of the trust company that
he would require at least $25,000,000 to meet the maturities already
accumulating and to be expected by the end of the following day. He
reviewed his own efforts to raise additional funds all of which had proved
either abortive or insufficiently firm to meet Atlantic's immediate require-
ments. In the afternoon the trust company officers met with their own
solicitors to consider the courses open to them under the various trust
indentures. Default having occurred, and no remedy which would have
enabled the trustee to consider it purely technical or inadvertent being
anywhere in sight, there was no alternative to declaring all the principal
and interest due on all the notes secured by the trust indentures immedi-
ately payable on demand, the procedure which alone gave the trustee
power to act on behalf of the noteholders. Upon failure to comply with
the demand for payment by the borrower the trustee could take posses-
sion of the pledged security and either sell it, or apply to the court to be
appointed receiver, or generally take any action to enforce payment of
the borrower's obligations. On Wednesday a second meeting was held
with the representatives of Atlantic at which Morgan urged operation
of the company's affairs by the trustee as mortgagee in possession, and as
a last resort the trust company officials met with those of Atlantic's
bankers, the Toronto-Dominion Bank, the Royal Bank of Canada and
the Bank of Nova Scotia to explore every possibility of restoring liquidity
to its affairs. Here they were confronted not only with refusal to provide
further credit but with the fact that all Atlantic's bank accounts had been
immobilized, and the process of issuing cheques and making deposits,
more than ordinarily vital in the case of a finance company, was at a
standstill because of the threat of seizure. This conviction of Atlantic's
bankers that they could not extend their facilities to a company which
was manifestly insolvent also convinced the Montreal Trust Company
that receivership was the only course open. Accordingly a formal de-
mand was made for payment of the principal and interest of the notes
and the company formally expressed its inability to do so.2
Receivership
The sensation was immediate and immense. Although Royal
Securities, obsessed with the difficulties of its own position and the desir-
ability of presenting Atlantic's cheque again to the Toronto-Dominion
Bank or of reinstating the note, did not inform S.F.C.I. of the fact that it
had been dishonoured until June 18, the Toronto press announced
the default on the 1 6th. The common shares of Atlantic Acceptance, the
price of which had broken sharply on the 15th downward from a level
of $20.00 current the week before, closed at $7.25 a share at the close of
business on the Toronto Stock Exchange on June 16, a day which saw
•Exhibits 781-3.
18
Chapter I
59,200 shares change hands. After considerable activity thereafter on
account of the uncertainty surrounding the company's future, trading
was suspended on this exchange on July 13, at which time the price of
common shares had fallen to $1.65, dragging that of the two preferred
issues down with it into insignificance. On June 17, the Montreal
Trust Company, as trustee under the various trust indentures securing
the senior, subordinate, and junior subordinated notes of Atlantic,
informed their holders that the company's failure to make payment on
certain senior notes maturing on June 14 and 15 constituted an
event of default under the trust deed of 1962, and on the same day
applied for and was granted by the Supreme Court an order appointing
it receiver and manager of the company's undertaking, property and
assets. Earlier on the same day, indeed at nine o'clock in the morning,
Atlantic's board of directors held their first meeting since June 9,
when plans had been made to issue additional common shares, and at
the annual meeting of shareholders held on that date the twelfth annual
report had been presented with the auditors' report for the year ending
December 31, 1964 showing new levels of prosperity in the company's
affairs.
At this meeting the following directors of Atlantic were present:
C. Powell Morgan, the president of the company; Alan T. Christie,
president of Great Northern Capital Corporation Limited, which was the
owner of 53.3% of Atlantic's common stock, and who was himself
a partner of Lambert & Company, a Wall Street firm of investment
bankers who in turn controlled Great Northern Capital; J. Aubrey
Medland, president of Culverhouse Canning Company Limited, and
vice-president of Atlantic; Paul C. Sheeline, a New York City
lawyer and another Lambert partner representing the Great North-
ern Capital interest; Jacques Kayaloff, the most recently appointed
director, and also representing Great Northern Capital; and William H.
Wallace, a retired pharmacist from Montreal and one of the founders
of the pharmaceutical business known as Ayerst, McKenna & Company.
Christie had heard of the default on the Monday of its occurrence by a
telephone call from Morgan to his house in Scarsdale, N.Y., before the
former had left to return to Toronto, Wallace from a friend in Montreal
who had called him inquiring about the disturbance in the price of
Atlantic shares, Medland from a broker on the Tuesday as soon as the
investment dealers had been advised. Absent from the meeting was
Walter H. Martin, a professional engineer and manufacturer from
Hamilton who was on holiday in the French River district and who
subsequently learned the news from a three day old newspaper when he
came out of the bush for provisions, and Wilfrid P. Gregory, Q.C.,
president of British Mortgage & Trust Company who emphasized his
absence by sending in his resignation from the board. The minutes of this
19
Default
meeting are meagre,1 being confined to a resolution accepting Mr.
Gregory's resignation and one of a declaratory nature to the effect that
the company's bankers would not honour its outstanding cheques, and
it is necessary to examine the evidence of the directors themselves, partic-
ularly that of Medland2 and Christie,3 to recapture its atmosphere and
the nature of its business. Beginning early, it lasted, other than for a
lunch-time adjournment, throughout the day.
The explanation given by Morgan, and accepted without question
at this stage by the other directors, was that the company's difficulties
resulted from the shortage of short-term money, especially from sources
in the United States, and indeed in the course of the week Morgan issued
statements to the press indicating that although Altantic was technically
in default there were ample assets to take care of all the company's
obligations in due course. Two unusual notes were struck. The first was
Morgan's anger over suggestions being made by an American journalist
that the collapse of Atlantic was connected with the appearance on June
14 of forty-one orders to New York brokers accompanied by forged
cheques, apparently certified by the Royal Bank of Canada, drawn by
Sassoon's Far Eastern Trust Limited of Nassau in the Bahamas, a name
which was suggestive of the E. D. Sassoon Banking Company Limited,
a well-known firm in those islands. Since the spurious cheques purported
to represent payment for nearly $6,000,000 worth of securities a con-
siderable stir was the result, and particularly since, among orders for
established American issues such as those of General Motors, American
Telephone & Telegraph, and Texas Gulf Corporation, were mingled
orders for the purchase of shares in three Canadian companies, Jockey
Club Limited, Commodore Business Machines (Canada) Limited and
Racan Photo-Copy Corporation Limited; the last two, especially Com-
modore, being known to have close connections with Atlantic and its
officers, there was speculation that this attempt at a fraudulent coup was
connected with the Atlantic default. Morgan played to his colleagues a
recording of a telephone conversation between the New York journalist
and himself in which this suggestion had been made by the former and
which he resented with unaccustomed vehemence. As will be seen later
when this remarkable occurrence is examined in detail its true nature
was quickly apprehended, and only a very small proportion of the orders
were filled by the brokers concerned. Nor did it apparently have any
connection with, or effect on Atlantic's failure to meet its obligations on
the same day, but Morgan was convinced that the notoriety connected
with it had adversely affected his ability to raise funds in New
York at that time, and this effect had been deliberately planned by
the authors of the swindle. He had, however, recovered his poise when
'Exhibit 26.
2Evidence Volume 92.
"Evidence Volume 91.
20
Chapter I
there unexpectedly appeared representatives of the General Acceptance
Corporation, a large American finance company, accompanied by their
local solicitors, to discuss with the board the possibility of buying Atlan-
tic or buying its accounts receivable, and he impressed everyone at the
meeting with his ability to answer the searching questions put to him
without hesitation and in full. During the day Messrs. Christie, Medland
and Kayaloff paid a visit to the head offices of the Toronto-Dominion
Bank, apparently more as a visit of ceremony than for any specific
purpose, and were there informed by Mr. Lawrence that he knew of
nothing wrong with Atlantic's loans.
So little was it suspected that anything was seriously amiss that both
Great Northern Capital Corporation and J. A. Medland bought Atlantic
stock at about $6.50 a share, but on the immediately succeeding days the
company's affairs began to wear a more serious aspect. Christie, Medland,
Sheeline and Kayaloff attended an early morning meeting on June 18
with officers of the Montreal Trust Company. From there Medland and
Sheeline went to see Morgan at 100 Adelaide Street West and received
their first intimation of the crucial position of the Adelaide Street subsidi-
aries, Commodore Sales Acceptance, Commodore Factors and Adelaide
Acceptance, the receivables of which had since the end of Atlantic's
fiscal year at December 31, 1964 risen by some $20,000,000 to $51,-
413,876. As the three men went over the individual loans one by one
Medland and Sheeline became more and more concerned and Morgan's
composure eventually deserted him. He pointed out to Medland after
Sheeline had left for lunch that his hands were shaking and that he had
to see a doctor. Finally he said, "If they get into those files out there of
Commodore Sales all hell will break loose," and he asked Medland not
to mention this state of affairs to the other directors. Medland declined
the suggestion and, after calling Sheeline back to the meeting, continued
the examination until Morgan eventually said, "I take the entire respon-
sibility for this mess."
In the meantime the Montreal Trust Company lost no time in
exercising its new powers. It had the immediate problem of continuing
the business operations of Atlantic to the fullest extent possible, and pro-
vision had to be made at once for releasing the company's bank accounts
and restoring the normal flow of sales finance and small loans business
with a staff which badly needed reassurance as to status and tenure. The
company's auditors, Deloitte, Plender, Haskins & Sells, were asked to
make an immediate inspection of all the accounts receivable of the
companies for whose audit they had been responsible at the end of the
previous fiscal year, and Clarkson, Gordon & Co. were engaged to
examine those of the subsidiary companies which had not been audited
by Deloitte. It was not long before the situation of Commodore Sales
Acceptance, Commodore Factors and Adelaide Acceptance was at least
21
Default
in outline disclosed. In the receiver and manager's first report, pro-
duced with remarkable dispatch on August 18,4 it was announced that a
prudent reserve for losses for the $51,400,000 receivables of these three
companies would be in the order of $34,000,000, a staggering revelation
even after two months of steadily deepening foreboding. When the
nature and scope of the loss, although only in outline, were revealed to
Atlantic's directors in the week following default, they immediately
arranged to secure the resignation of C. P. Morgan. This was dated
June 17. Morgan however remained on the scene. He was employed
temporarily by the receiver and manager to assist the Clarkson Company
Limited which had been retained by the former to bring the accounts
of the Adelaide Street group of companies under control. He appeared
at at least one of the meetings of the Atlantic noteholders to furnish
explanations, and he was heard to say privately that it had been a mistake
to demand his resignation since, given time, he could have "pulled the
company through". He stayed in Toronto until his death in October
of the following year.
Public Anxiety and Government Action
By the end of June it had become clear that the failure of Atlantic
Acceptance was having wide repercussions, particularly upon public
confidence in other finance companies in Canada. A detailed account
of what these effects were in relation to the money market and
the ability of Canadian finance companies to borrow therein can
be found in Chapter XIX, and it is sufficient to say here that by
the end of the month an alert and well-informed press had rejected the
earlier supposition of a temporary shortage of funds due to American
fiscal policy, and had begun to examine the financial structure and
relationships of Atlantic itself with a critical and disapproving eye. Early
in July it became apparent that British Mortgage & Trust Company
of Stratford, Ontario, one of the oldest and formerly most conservative
of the smaller trust companies in Canada, was in serious difficulty as a
result of its holdings of Atlantic securities. The company's stock, which
had been quoted at over $30 a share earlier in the year, fell from a price
of $26 a share prevailing on July 8 to a bid of $8 a share on July 9.
The president and managing director, Mr. Wilfrid P. Gregory, Q.C.
formerly a director of Atlantic and of Commodore Business Machines
(Canada) Limited, in the midst of negotiating for a substantial capital
investment in the trust company by Denison Mines Limited, made a
reassuring statement as to the essential strength of his company and
referred to "vicious rumours" circulating about its stability. Public
attention was nevertheless directed by the press to British Mortgage &
Trust with increasing frequency and, because of the deposit-taking
Exhibit 786.
22
Chapter I
functions of trust companies, a note of alarm was struck and began to
intensify. In view of the extent of its holdings of Atlantic paper, which
Gregory repeatedly described as small, considerable bewilderment devel-
oped as to the serious effect of Atlantic's default on an established trust
company eighty-eight years old. Two things became apparent; first, that
British Mortgage & Trust had, like Atlantic, in recent years expanded
very considerably in terms of its former size and activity, and second,
that the little-understood word "liquidity" was the real key to stability in
even the briefest period of loss of confidence by the public. Gregory
reluctantly and under pressure resigned as president and from the board
of British Mortgage & Trust Company on July 27 and was succeeded
by Harold R. Lawson, president of the National Life Assurance
Company, who had been a director since December 1964.
By the end of July 1965 measures had been taken to restore public
confidence. The Bank of Canada, as indicated in the report of the gover-
nor for 1965, persuaded the chartered banks to make funds available to
finance companies on an unprecedented scale to compensate for the drastic
reduction of those available from institutional lenders and other sources,
both in the United States and Canada, which the collapse of Atlantic
Acceptance had caused. The government of Ontario undertook to protect
the depositors in British Mortgage & Trust Company up to a limit of
$3,000,000 and thereby brought to an end the mounting series of with-
drawals which threatened to close its doors. But for investors in both com-
panies and lenders to Atlantic it was clear that the loss would be very
serious. Speculation on the street and in the newspapers culminated in
the appearance of the report, above referred to, of the receiver and man-
ager dated August 18. It revealed an estimated realizable value of
the assets available to creditors to be short of their claims by $32,355,920
without taking into account a possible increase of liability depending
upon the result of the action, then pending in the courts, by Royal Secur-
ities Corporation to reinstate the senior note held by S.F.C.I.. By March
1966, when evidence as to the estimated loss in Atlantic and its sub-
sidiaries was given to the Commission on behalf of the receiver and
manager, the loss was estimated, without taking into account potential
recoveries from litigation or the expense of receivership, at between fifty
and sixty-four millions. Subordinated and junior subordinated note-
holders and all the shareholders of Atlantic would suffer total loss, and
only the senior noteholders could contemplate recovery of part of the
amount of their claims. The shareholders of British Mortgage & Trust
by an exchange of shares with Victoria and Grey Trust Company, with
which it finally merged in September 1965, received the equivalent of
$2.50 per share.
Steps had been taken by the Attorney-General of Ontario immedi-
ately after the Atlantic default to institute an investigation by the Ontario
Securities Commission. By the end of July it had become apparent that
23
Default
an inquiry limited by the jurisdiction of the Securities Act, and by the
paramount preoccupations of the Securities Commission over the whole
field of securities regulation in Ontario, did not do justice to a situation
which had produced the heaviest loss of any financial disaster in Cana-
dian history, and the appointment of a Royal Commission was decided
upon.
The Royal Commission in Ontario
On July 30, 1965, I was asked by the Prime Minister of Ontario
to accept a commission under the Public Inquiries Act1 to inquire into
the causes and effect of the failure of Atlantic Acceptance Corporation
Limited to meet the obligations evidenced by its securities. This I agreed
to do, and Mr. Robarts thereupon issued a statement in inter alia the
following terms:
"There has been a good deal of apprehension among the financial com-
munity and the public generally since the Atlantic Acceptance Corpora-
tion Limited indicated that it was unable to meet its obligations. When
the difficulties of this company were first reported to the Government, the
Attorney General ordered that an investigation of its affairs be under-
taken by the Ontario Securities Commission under sections 21 and 23
of The Securities Act, R.S.O. 1960, Chapter 363, and amendments
thereto.
Since the 16th of June the Securities Commission has been carrying
out a very active investigation and has made several interim reports
which have indicated that a very complicated and widespread investiga-
tion will be necessary, as there are many companies involved in trading
with Atlantic Acceptance Corporation Limited. Under the terms of The
Ontario Securities Act the investigations of the Commission are gener-
ally directed to whether any transactions which have taken place are in
breach of the Act. Upon examination of the reports which have been
received, and after a full discussion with the Attorney General, and the
chairman of the Ontario Securities Commission and upon their recom-
mendation, I have concluded that the breadth and extent and the
ramifications of the dealings of Atlantic Acceptance Corporation Limited
are such that an investigation extending beyond the limits imposed upon
the Securities Commission by the statute under which it operates is
indicated.
I have, therefore, decided that the public interest will be met by a
complete and public investigation of this company, its various trans-
actions and activities and its relationships and business dealings with
other companies, both domestic and foreign.
Such an investigation can best be undertaken by a Royal Commission
obtaining its power under The Public Inquiries Act, R.S.O. 1960,
Chapter 323 and with full power to summon witnesses, examine books
and papers and generally present to the public the full story of this
company and its operations in all its details, and to make such recom-
'R.S.O. 1960, c. 323.
24
Chapter I
mendations as it may deem fit. It is my intent to appoint a Royal
Commission and I have asked the Honourable Mr. Justice Samuel H. S.
Hughes of the Supreme Court of Ontario to serve in this capacity and he
has agreed. The terms of reference of the Commission will be drawn in
detail in consultation with the Commissioner.
It is intended that the exhaustive investigation in which the Ontario
Securities Commission is presently engaged will be continued and its
results will be made available to the Royal Commission.
The inquiry will have no effect on the agreement already reached on
the proposed merger between Victoria and Grey Trust Company and
British Mortgage & Trust Company, and it is our hope that the merger
will be completed according to the terms of the agreement. The action
of the Government in regard to the affairs of British Mortgage & Trust
Company has been directed to the protection of the depositors and
holders of guaranteed investment certificates through the provision of
time in which the transaction can be completed. We are hopeful that
our aims in this regard can be achieved.
It will be our intent to ask the Royal Commission to also make
recommendations as to what steps might be taken to ensure that the
events which have been revealed in connection with Atlantic Acceptance
Corporation Limited are not repeated in the future."
On the following Wednesday, August 4, Mr. A. E. Shepherd
Q.C., senior partner of the London, Ontario firm of Shepherd, Mac-
Kenzie, Plaxton, Little & Jenkins, a former Assistant Crown Attorney
for the County of Middlesex and prominently engaged in litigation and
the practice of company and commercial law, accepted my invitation to
act as counsel to the Commission.
I was fortunate in being able to turn for advice and assistance to
the Honourable Mr. Justice Arthur Kelly, who at this time was com-
pleting the work of the Royal Commission on Windfall Oils and Mines
Limited, which had been constituted almost exactly a year before. Royal
Commissions in Ontario have not been so numerous or so protracted as
hitherto to warrant the establishment of a staff nucleus, such as exists
in Ottawa in the office of the Privy Council, and since the administrative
initiative rests with the Commissioner the housekeeping problem has
been approached in a variety of ways. Since the Kelly Commission was
still in being and had met and solved many problems of liaison with
government departments, the problem of the provision and expenditure
of funds being not the least important, the opportunity of inheriting its
accommodation in a government building and as much as possible of its
furniture was well worth the slight delay incurred by waiting for its
operations to conclude. Even this was much reduced by the generosity
of Mr. Justice Kelly in permitting an assumption by stages of the
accommodation and the services of members of his clerical staff, so that
by mid-September the Commission, with the assistance and approval of
the Department of Public Works, had acquired full use of the premises at
25
Default
454 University Avenue in Toronto. This consisted of offices and a room
for the public hearings of the Commission which served their purpose
well and economically.
The first task of counsel was to inform himself of the extent to
which the Securities Commission had proceeded and as to what informa-
tion was in their hands and in those of the Montreal Trust Company,
the Clarkson Company Limited and Clarkson, Gordon & Company, the
last, as has been seen, having been especially engaged on examination
of the loans of the subsidiary companies situated at 100 Adelaide Street
West. Mr. Shepherd produced on August 16 a first report containing
a summarv of this information and a prescient forecast of the magnitude
nnd complexitv of the forthcoming inauiry. As a result it was clear that
the Commission would have to launch its own accounting investigation
on an extensive scale, notwithstanding the information accumulated and
work done bv the Clarkson firms for the trustee, the results of which
were made freely available. To this end Mr. John A. Orr, F.C.A..
a senior partner of the firm of Touche, Ross, Bailey & Smart,
chartered accountants, with many offices and affiliations in Canada and
around the world, was engaged as auditing and financial adviser to
the Commission on August 23, and authorized to employ under the
direction of counsel as many members of his own firm and of other
firms of chartered accountants as might be necessary to expose the affairs
of Atlantic Acceptance, its subsidiaries, British Mortgage & Trust
Company and many other companies which had been recipients of Atlan-
tic's funds. In all, the affairs of 282 corporations were examined. In
practice this meant the continued employment of Clarkson, Gordon &
Company, in addition to Touche. Ross, Bailey & Smart, for many months
because of the former's close relationship with the Clarkson Company
Limited as liquidator and trustee in bankruptcy acting on behalf of
the receiver and manager, and with the affairs of Atlantic's subsidiaries
since the time of default.
It was clear also that additional legal assistance would be necessary.
Accordingly, in the first week of September, Mr. R. I. Cartwright of the
firm of Haines, Thomson (now known as Thomson, Rogers), himself a
one-time Assistant Crown Attorney in Toronto, was engaged as assistant
counsel to the Commission. Its administrative needs, which threatened
to be, and indeed became formidable, were met by the appointment as
secretary of Lieutenant-Colonel J. B. Lind, CD., executive officer of the
Ontario Economic Council and previously a staff officer of the Canadian
Army, who began his work on September 7, and by that of Captain V. F.
Cunnington, CD., recently retired from the same force, as registrar on
November 22, by which time a mass of documentary evidence, deposited
pursuant to subpoena at the first public hearing of the Commission on
October 1 2, urgently needed classification and arrangement in preparation
for its piece-by-piece introduction into evidence at subsequent sessions.
26
Chapter I
The preliminary investigative work which confronted counsel and
accountants was of such proportions that regular public hearings of the
Commission were not contemplated at all in 1965, and in fact did not
commence until January 12, 1966. Since that date they have been held
on 128 days concluding on the 12th day of September, 1968. The
number of volumes of the transcript of evidence taken at the public
hearings amounted to 127 consisting of almost 17,000 pages. To these
volumes there must be added 204 volumes of transcript of evidence taken
under oath in examinations conducted pursuant to the Securities
Act2 either by officers of the Ontario Securities Commission or by
Mr. Cartwright, who was appointed as such for this purpose, 69
volumes of transcript of evidence taken likewise under oath and
for the purpose of discovery in bankruptcy proceedings, 18 volumes
of evidence taken by officers of the United States Securities and Exchange
Commission pursuant to an order authorizing an investigation into the
Sassoon's Far Eastern Trust case, 7 volumes of voluntary depositions,
2 volumes of examination for discovery in a civil action, and 2 volumes of
proceedings in a criminal trial, making 454 volumes in all. No fewer
than 182 witnesses, many on several occasions, testified under oath at
the Commission's hearings and 5124 separate exhibits were entered in
evidence.3
The introduction of these records of examinations, taken in other
proceedings and under other statutes, gave rise to a case stated in the
Court of Appeal to determine whether in cases where witnesses
had claimed protection against self-incrimination by virtue of the pro-
visions of section 5 of the Canada Evidence Act4 and section 9 of the
Evidence Act,5 they were receivable in evidence before the Royal Com-
mission. The court unanimously decided that they were, in that their
use by a commissioner under the Public Inquiries Act did not constitute
use against such persons in a civil proceeding or a proceeding under any
act of the Legislature. The stated case and the transcript of the oral
judgment of the court may be found at Appendix C6 to this report, and
the argument which gave rise to it is contained in volume 94 of the
Commission's evidence.
The services of Mr. J. N. Abell, M.A. (Oxon.), who was highly recom-
mended by both the academic and financial communities in Toronto as
being by training and occupation qualified to produce a special study on
the effects of the Atlantic failure on the money market, were obtained by
negotiations with Wood, Gundy & Company Limited in October. Mr.
2R.S.O. I960, c. 363.
'Appendices A and B respectively.
'R.S.C. 1952, c. 307.
8R.S.O. 1960, c. 125.
•Exhibit 3875.
27
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Abell was at the time managing director of Wood, Gundy (International)
Limited of Toronto and has since become president of Wood, Gundy &
Company Incorporated of New York. He began his work on January 4,
1966 and during a period of four months thereafter completed his report
to the Commission which appears in Chapter XIX. It was subsequently
revised by him and was delivered in its present form on October 26,
1966. It speaks generally from that time when the immediate impact
of Atlantic's failure was measurable after more than a year of observa-
tion. This comprehensive survey, with its accompanying statistics, will
speak for itself and is the source of whatever additional conclusions
may have been drawn in my report.
A valuable addition to the investigative staff of the Commission
was provided by Chief Constable J. A. Mackey, Chief of Police of
Metropolitan Toronto, agreeing to the attachment to it of Detective-
Sergeant R. C. McMaster and Detective (now Detective-Sergeant)
Charles Angus of the Metropolitan Police, closely followed by the
securing on a similar basis of the services of Detective-Sergeant (now
Inspector) R. C. Barron, of the Ontario Provincial Police. Detective-
Sergeant McMaster, who had been associated with the Windfall inquiry,
and who had prime responsibilities in that connection, was succeeded as a
Commission investigator by Detective W. A. Smythe, and he in turn by
Detective Maurice H. Wilson. In practice the investigation of the Ontario
Securities Commission, other than into the affairs of Racan Photo-Copy
Corporation Limited, ceased with the constitution of the Royal Com-
mission. C. P. Morgan, who had been examined by the Securities Com-
mission in July, was first questioned by Mr. Shepherd on a voluntary basis,
and not under oath, on September 4, 1965.
It has been often said, and can bear repetition, that an inquiry of the
type undertaken here is not a trial but rather an inquest for information to
enable a commissioner to make his report to the Lieutenant-Governor
in Council. All of the evidence taken at public hearings was given under
oath. All of it being for the information of the Commissioner, the
distinction between examination in chief and cross-examination did not
exist. The procedure adopted did not contemplate the putting of ques-
tions by counsel for any of the affected parties or witnesses except by
leave of the Commissioner, and then generally subject to the limitation
that additional questions could be suggested to counsel for the Com-
mission and put by them. This limitation was relaxed only where
evidence of criminal or improper conduct had been produced. At the
conclusion of the evidence introduced by counsel for the Commission
a period was set aside, pursuant to notice, commencing on May 30,
1967, for the reception of evidence which affected parties desired to
give. It must, however, be borne in mind that counsel for the Com-
mission, conscious of the fact that the receipt of evidence was largely
28
Chapter I
public and in the presence of the press, invariably discussed the nature
of the questions to be put to witnesses with them beforehand, in private
and in the presence of their solicitors or counsel. Thus, it was hoped, there
might be maintained, consistent with the need to protect a truthful witness
from damage to his reputation, the right of the public to be as fully
informed as possible of the proceedings of the Commission and of the
nature of the evidence. The possibility of surprise and confusion was
accordingly reduced, the maximum of preparation before a witness was
examined was ensured, and the considerable expenditure of time involved
in putting and answering questions at random, which necessarily accom-
panies the trial of cases in court, was eliminated.
After the conclusion of the public hearings, which for all practical
purposes ended in May of 1967, the Commission was confronted with
the problem of regulating the availability and use of the large collection
of documents in its custody. I had taken the position, not always prevail-
ing in inquiries of this type, that prosecutions and civil litigation arising
out of the evidence given should not wait upon the production of my
report which would necessarily require long and anxious preparation.
Accordingly, documents, mostly in the form of photostatic copies, were
furnished to the Crown and to counsel for the defence in a number of
prosecutions and to counsel engaged in urgent civil matters on terms
designed to ensure fairness to both sides of any cause. Where the Com-
mission's investigators uncovered evidence of irregularity or impropriety,
the pursuit of which would have exceeded its terms of reference, law
enforcement agencies and appropriate regulatory authorities were advised.
On March 7, 1966, the fifth occasion on which public hearings
had been held, counsel called Mr. Orr to the stand as the first witness to
testify at length and other than in the course of identifying items of docu-
mentary evidence previously introduced. In his opening statement Mr.
Shepherd set out the method of the investigation and the sequence of the
evidence which he proposed to adduce in the following terms:
"May it please the Commission. Sir, in company with my learned
friend R. I. Cartwright, I propose to begin today calling before you
witnesses whose testimony may assist the Commission to report upon
the matters raised in the Order-in-Council directing this inquiry to be
made.
As this evidence unfolds, sir, it may be that you will conclude that
this Commission is called upon to deal with a set of facts which is
unique in respect to its complexity and its scope. You have more than
once made plain at earlier hearings, sir, that this inquiry is not a trial,
but rather an inquest to determine what occurred, to the end that
measures may be taken, so far as that is possible, to ensure that a
similar failure will not readily occur again.
Accordingly, the procedure which would be adopted at a trial, either
criminal or civil, is not entirely appropriate here. Were this a trial,
29
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counsel in my position, sir, would no doubt begin by opening the case,
that is, by reciting with some particularity the evidence he believed
would be given, and pointing to the significance he considered such
evidence to have.
An opening statement of that nature is not, in my respectful view,
appropriate to an inquiry such as this, and yet the volume and com-
plexity of the evidence require that at least an indication be now given
of the order in which the matters germane to this inquiry will be dealt
with; the sequence in which the evidence, in the most general terms,
will be called; and the methods which will be adopted in laying that
evidence before the Commission.
I give this indication of order, of sequence, and of method, in the
belief that it will assist the Commission, and in the hope that it may
assist persons who deem themselves particularly affected by this inquiry,
and their counsel, in that they may be able the better to assess when
matters with which they are more closely concerned are likely to be
dealt with.
Given, sir, the very great number of companies involved in the
matters being inquired into, the intricacy of the relationship between
those companies, and the size of the body of evidence to be heard, it is
quite obvious that any one of many orders might have been adopted in
presenting that evidence, and doubtless any one of them would be as
good as any other. It is, however, in my respectful view, less important
what order is adopted than it is that some order be adopted; that it may
be announced in advance, and that it thereafter be adhered to as rigidly
as circumstances may permit and the Commission shall think proper.
Therefore, subject always to the direction of the Commission as
announced from time to time, counsel propose, sir, to adopt this order.
First, since you, sir, are called upon to inquire into the collapse of
Atlantic Acceptance Corporation Limited, among other matters, evi-
dence will be called first to show what that company was according to
its financial records at the time the collapse occurred.
That evidence will comprise, first, the corporate structure of the
complex of parent and subsidiaries as at the date of the receiving order
which (and evidence will be called to this effect) was 17th June, 1965;
next, the assets and liabilities which the company had according to its
records on that date; next, how the company grew from its inception to
the date of its collapse according to its records, so that it had those
assets and liabilities; next, from what sources the parent company had
received its money, and then to whom the parent and its subsidiaries did
loan this money; and, generally, all other matters relevant to the financial
history of Atlantic Acceptance Corporation Limited from its birth to its
death, all according to the records of the company.
This evidence, which will be given by one witness, must of necessity
be of some length; it must of necessity be somewhat technical in nature;
but, as I have said, sir, it will come first because it is intended to disclose
to the Commission what the company was, what it is that you are
dealing with, what it was when it collapsed, and how it reached that
position.
30
Chapter I
That first matter having been dealt with, sir, it is evident that the
collapse into which this Commission is inquiring, among other things,
had a proximate cause — the company's default in paying a note, and
this event, is, you may consider, the proximate cause of us being met
here today. Accordingly, we will deal with that second in the order.
Then, sir, as the result of the collapse of this company, there was a
loss to creditors, investors and others. Evidence will be called to
determine, in the round and not in detail at this stage, what that
aggregate loss is now estimated to be so far as it can be estimated at the
present time.
Fourth, having shown what the company was, how it came to be
placed in receivership, and approximately what loss might be expected,
evidence will then be called respecting major transactions involving
large loans or large investments by Atlantic or companies associated
with it, and this will be done generally in chronological order with
reference to the date on which the transaction concerned started. The
point of commencement in time from which that chronological order will
extend will be the acquisition of Aurora Leasing Corporation Limited
in late 1960 by those who were still numbered among its shareholders
in the summer of 1965.
These transactions, sir, will be dealt with one at a time and originally
by eliciting the testimony of accountants and others who can produce
documents and describe the movements of money. Witnesses who might
be expected to have some personal knowledge of the facts will also be
called to testify to such specific transaction then under review.
Now, sir, since some witnesses have knowledge of facts involved in
more than one transaction, and since in my respectful submission it is
imperative, if chaos is to be avoided, that these matters be dealt with
one at a time: it may be necessary for some witnesses to attend on
several separate occasions, and the whole evidence of such witnesses
relevant to every phase of the inquiry will not be obtained on any one
appearance, though in sum the whole of their evidence will, of course,
be obtained. Neither will every aspect of every company be dealt with in
one occasion. Transactions will be dealt with in turn.
Accountants will, subject always to the direction of the Commission,
produce documents which appear to be relevant to the matters under
review, taken from the files of the Commission. Where such documents
have not yet been identfied, accountants will, subject always to the
Commission's direction, deal with those documents; but I undertake
later to call evidence proving the origin of such documents, including
evidence as to who wrote a document where it is in handwriting. I give
that undertaking now, sir, once and for all.
Some of those more closely concerned with Atlantic and companies
associated with it, such as the principal officers, may have knowledge
of a great many transactions with which we will deal, and they will not
commonly be called repeatedly to testify after each single matter has
been dealt with, but they will be called to determine whether they can
assist the Commission after the evidence of accountants and others
touching such major transactions has been heard, at which time their
31
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evidence will be elicited respecting their entire knowledge of the matters
with which this Commission is concerned.
Next in order, sir — and I think it may be fifth — after the major trans-
actions have been dealt with and those apparently more closely con-
cerned with them have been heard, it will be the hope of counsel that
the Commission will be informed about how the loss came to be incurred.
We will then turn to the question of whether the published financial
information respecting Atlantic prior to its sudden collapse, was correct.
To this end evidence will be called to determine whether the audited
financial statements for 1963 and 1964 would have been substantially
the same as those published if all parts of the corporate complex had
been examined, in the light of knowledge then at that time available and
applying the tests which it is customary for accountants to apply.
We will further examine, sir, what rules are generally applicable in the
profession of accounting, so far as they are relevant to the matters into
which this Commission is inquiring, and the degree to which they were
observed by all concerned.
Sixth, having determined whether the published financial information
was correct, we will then turn to the security which the company gave
for the moneys it borrowed from the public. This security, sir, was
principally to be found in the deeds of trust, and they require the
production and delivery of various reports of the company. Evidence
will be called to determine the accuracy of those reports and to deter-
mine whether the deed of trust was complied with by anyone who had
any obligation under it, and whether any default occurred prior to the
collapse.
In furtherance of this aspect of the inquiry and the aspect which I
mentioned just previously, all the accountants concerned will be called
to testify as well.
We will now, sir, have dealt with what the company was according
to its records at the time of the collapse; the proximate cause of it going
into receivership; with the estimated loss, causes of the loss; with whether
the financial records to which I have referred were correct; with the
security afforded by the deed of trust on which borrowers relied.
It is at this point that counsel deem it appropriate, subject always to
your direction, to call the directors to testify respecting all that has gone
before, so far as they are able to assist the Commission.
Next we will then call evidence to deal more briefly with any smaller
matters, if any there be, to which reference has not already been made
in the mass of evidence which has gone before — simply mopping up, as
it were; and we will deal with trading and share prices and the like.
Then, sir, during the course of the evidence relating to Atlantic, it
may be that loans made by British Mortgage & Trust will have
required some consideration. This company, however, operated under
different laws and regulations peculiarly applicable to trust companies.
It is, as I concede, impractical to interrupt the flow of evidence respect-
ing Atlantic by pursuing in detail every British Mortgage & Trust trans-
action as it first comes to light, and yet these transactions must be
examined.
32
Chapter I
Therefore, the degree to which British Mortgage & Trust is concerned
with the matters into which this Commission is inquiring, will be dealt
with separately and in this place in the order of evidence, subject always
to your direction. This aspect of the inquiry about British Mortgage &
Trust will follow in the main the order and sequence I have already set
out respecting Atlantic, with the addition of evidence touching the nature of
the legislation under which this company operated and its administration."
33
CHAPTER II
The Early Days
The preceding chapter began the story of Atlantic Acceptance at the
end rather than at the beginning. This treatment was not an attempt
to employ dramatic effect but to place the origin of this Commission in
its proper setting. It is necessary now to turn to the earliest days of the
company's existence, some sixteen years ago, to describe the realization
of the ambition of one man who was the dominant figure in its affairs
until the day of its collapse and whose shadow lies across all that is to
be subsequently described and discussed in this report. In the first six
years it will be seen that the company's growth owed much to the
accidents of his personal friendships, the ready address which seldom
failed him and the agility of his ingenious and inventive mind. By 1959
an obscure concern, carrying on a sales finance business of modest
proportions and doubtful quality, had been remarkably transformed, and
it is with this process that the present chapter deals.
C. P. Morgan
Atlantic Acceptance Corporation Limited was the creation of C. P.
Morgan and, since its origin and early years in particular cannot be
separated in any intelligible way from his personal activities, some
attention must here be given by way of introduction to the details of his
life prior to the six years between 1959 and 1965 with which this report
is mainly concerned. When he was stricken with acute leukaemia at the
end of April, 1966, the Commission had to decide what course to take
within the hour. He had not yet been called before it at a public hearing,
except to identify some documents, because the logical position for his
evidence had not yet been reached. He faced a searching and protracted
examination which could not have lasted less than three weeks and
might conceivably have taken longer. Except when required by the
34
Chapter II
court in the Royal Securities case or for examinations in various bank-
ruptcy proceedings, he had been present each day at the sessions of the
Commission until the time of his illness. When he became aware of his
condition he at once offered to give evidence under such circumstances
as his physicians might permit before going into hospital, a confinement
from which he had reason to believe he might not emerge alive. The
news of this development was given to the Commission by his solicitors,
and it forthwith adjourned to take evidence at Morgan's house in
Toronto on May 2. The hearing was resumed on the following day and
the transcripts of the testimony given under these circumstances may be
found in volumes 25 and 26 of the evidence. To explain the problem,
and the decision taken, I can do no better than quote what I said in
public on the morning of May 3 before adjourning a second time to
continue receiving this evidence:1
"THE COMMISSIONER: Yesterday morning before the hearing com-
menced, I was advised by counsel for Mr. C. P. Morgan, the former
President of Atlantic Acceptance Corporation Limited, that he was
seriously, perhaps dangerously ill and urgently required admission to
hospital and treatment.
Subsequently I made arrangements to be advised if Mr. Morgan could
be examined by the Commission with his physician's consent and under
circumstances which, of course, to a very great extent would be settled
by his physician's advice. Word was not received as to the possibility
of proceeding in this way until the commencement of the proceeding,
the public proceedings, of the Commission yesterday and as those
persons who were here will remember, an adjournment was effected
before any evidence was taken in the normal course.
It was not possible under those circumstances of apparent urgency
to make any statement at the time because I was not fully in possession
of the facts.
I have had, in consultation with counsel, an opportunity to consider
what the public interest is in the situation which has now been disclosed.
As all of those who have been present from day to day in this enquiry
will realize, Mr. Morgan is a central figure in most of the transactions
with which we have had to deal.
I am advised by counsel that he will continue to be a central figure
in the transactions about which evidence will be given in coming months.
There were, of course, two alternatives open to me. One was to
assume that Mr. Morgan would in due course recover his health and
return here to be examined in public. The other was to make the
opposite assumption and to decide whether, in the public interest, I
could afford to ignore an opportunity of obtaining what evidence might
be available now.
I do not want to be heard to say that the interest of interested
parties and counsel who have represented them here is divorced from
the public interest. Of course it is in the public interest to receive
'Evidence Volume 26, pp. 3411-4.
35
Early Days
evidence, as much as possible, in public and in the presence of counsel
for interested parties.
My problem was to decide where the preponderance of public interest
lay and I did decide, in consultation with counsel, that it lay in having
immediate in camera hearings until such time as Mr. Morgan might
secure admission to hospital.
I should say that Mr. Morgan has taken the initiative in offering to
give evidence at once before this Commission while he is able to do so
and is not affected by sedation incidental to treatment in hospital.
Unfortunately his domestic arrangements do not permit of the intro-
duction of any more than the bare minimum of people into his bedroom
and I am forced reluctantly to rule that counsel for other interested
parties — that is other than counsel for the Commission and for Mr.
Morgan himself — may not be present at these in camera hearings.
The transcript of this evidence will not be made public until such time,
if that time does arise — we may be permitted to hope it does not arise —
that it becomes apparent that Mr. Morgan may not be able to give
evidence in public. If he can, as we all hope he will, return to appear
before this Commission and his appearance will, of course, be a pro-
tracted one, then the transcripts of the evidence taken now will not be
made public.
If he does not return, then at the appropriate time they will be.
Consequently, at this stage I am going to continue to secure from
Mr. Morgan, under the circumstances which I have outlined, as much
of the very important evidence which he has to give as I can now obtain
before he enters hospital.
This hearing then will be adjourned until the same hour tomorrow
and we will continue to take Mr. Morgan's evidence, as much as we
can, subject to his physician's advice, in the course of this day."
But after this the patient's time ran out and he entered hospital the
next day. In due course he was released as a period of remission was
secured by drugs and blood transfusions, but he was never thereafter,
in his physician's opinion, able to face even the limited tests of endurance
which these two days had imposed. Much admiration is due the stoical
calm with which Morgan contemplated the doctors' verdict and his
determination to submit himself for examination while time remained.
Needless to say counsel had formidable difficulties to overcome in that
no time was given him to prepare his examination, which necessarily
ranged over the whole field of the witness's multitudinous transactions,
nor was there at hand the full range of documents which, in the normal
course, would have been put to him. Nevertheless, I had on these brief
occasions the impression that the only two men who really understood
the exceedingly complicated facts at that point were fortunately face-to-
face in my presence, and Mr. Shepherd's employment of the time at our
disposal may conservatively be judged as a masterpiece of improvisation
sustained by all that study and intuition could accomplish.
Under these circumstances, in which the physical weakness of the
36
Chapter II
witness was a painful and pervasive fact, there was little time for acquir-
ing the "background information" which would normally have emerged
at a prolonged public hearing. Morgan died in hospital on October
17, 1966 and the full extent of what he knew, or was prepared to
reveal, will never be known. What he did reveal was by no means the
whole story, even though he had also been examined twice by the
Securities Commission (in re Racan Photo-Copy Corporation Limited
and Analogue Controls Incorporated) and in eleven examinations for
discovery in bankruptcy proceedings (in the estates of Trans Com-
mercial Acceptance Limited, Evermac Office Equipment Company
Limited, Frederick's Department Store Limited, Masco Construction
Company Limited, Associated Canadian Holdings Limited, Dallas
Holdings Limited, N.G.K. Investments Limited, Cimcony of Canada
Limited, Valley Farm and Enterprises Limited, and Dalite Corporation
(Canada) Limited) . Other inquiries were made to establish, where these
were wanting in the transcripts, the particulars of his early history.
Campbell Powell Morgan was born at Peterborough, Ontario, on
Christmas Eve 1908. He matriculated at Windsor and thereafter was
for a brief period a junior clerk with the Royal Bank of Canada in that
city, going from there to the Briggs Manufacturing Company in Detroit
as a cost accountant. At this time he studied, according to his own
account, for two years at the University of Detroit. From September
1929 to February 1935 he was employed by Brockenshire, Scarff &
Co., an accounting firm in Windsor, and there he qualified as a char-
tered accountant. For a year he was employed in the corporations tax
branch of the Provincial Treasurer's Department in Toronto, and spent
the period from December 1936 to November 1939 as a senior auditor
with the well-known firm of Price, Waterhouse & Co. in the same city.
Throughout the war, and specifically from December 1, 1939 to January
27, 1947, he was assistant comptroller of Loblaw Groceterias Limited
which he left to join the International Silver Company of Canada
Limited, at that time in Hamilton and subsequently in Niagara Falls,
Ontario, where he remained until late in 1958. In March of 1948 he
was made a director of International Silver with the title of secretary,
assistant treasurer and comptroller. In April 1949 he was appointed a
vice-president, retaining this title until his resignation.2
Incorporation, Directors and Officers
Atlantic Acceptance Corporation Limited was incorporated as a
public company by letters patent issued under the Great Seal of Ontario,
dated January 28, 1953. Morgan's account of its origin is that, while
employed at International Silver, he became concerned about the
difficulties encountered by the selling agents of the company who were
competing in what he described as "a great wave of door-to-door selling"
■Exhibit 3799 and Commission file: C. P. Morgan.
37
Early Days
at this period, and were beset by demands for more lenient and extended
terms of payment by purchasers than they were able to obtain from the
manufacturer. He suggested that the company should go into the
business of financing these sales on a discount basis, a project which
was approved by the Canadian board of directors but rejected by that
of the American parent company of Meriden, Connecticut. Morgan
was allowed, however, to proceed with the idea of creating a small
finance company and Atlantic Acceptance was the result of this per-
mission. In the event it was not used for the purpose originally intended,
but began financing the sale of television sets produced under the names
of "Coronet" and "Premier"' at a time when the demand for any form
of television receiver was in the first flush of exuberance.
Light has also been cast upon the early years of Atlantic by the
evidence of David Davidson,1 and J. A. Medland2 and Alan T. Christie3
who were directors and Carman G. King.4 To avoid the repetition of
details of the election and resignation of the various directors at this
and later stages of the report a list of their names with dates of election
and resignation as at June 17, 1965 appears below.5 On June 14, 1955
the number of directors constituting the board was increased from five
to seven and on May 18, 1 965 from seven to nine.
Campbell Powell Morgan
John Earl Copeland
John Alfred Daley
Harry Cowan Whiteside
David Rainnie Pidgeon
Thomas Aynor Ratcliffe
Cecil Warborough Howe
Carl Tovell Bastedo
Mrs. Mildred Lucinda Morgan
Ernest A. Lindley
Norman F. Firth
Walter H. Martin
J. Aubrey Medland
Ramsey A. Evans
David B. Mansur
Anthony C. Rooney
Wilfrid P. Gregory
J. Aubrey Medland
William H. Wallace
Alan T. Christie
Paul C. Sheeline
Jacques Kayaloff
James E. McConnell
February 6, 1953
February 6, 1953
February 6, 1953
February 6, 1953
February 6, 1953
June 9, 1953
June 9, 1953
June 9, 1953
June 9, 1953
August 20, 1953
May 22, 1954
December 1, 1954
June 27, 1955
June 27, 1955
June 9, 1953
June 9, 1953
June 9, 1953
June 9, 1953
November 15, 1953
May 22, 1954
April 10, 1959
August 20, 1953
April 10, 1959
April 10, 1959
September 23, 1955
September 23, 1955
September 23, 1955 February 13, 1960
September 23, 1955 June 30, 1964
April 10, 1959 June 17, 1965
April 10, 1959
April 10, 1959
March 17, 1960
June 30, 1964
June 9, 1965
June 9, 1965
Evidence Volume 78.
'Evidence Volume 92.
•Evidence Volume 91.
'Evidence Volume 93.
'Exhibit 75, as amended.
38
Chapter II
Morgan was the president of the company throughout, other than for
the few days in which the provisional directors held office, until a few
days after Atlantic's default. Of the other directors the one with the
longest service was Walter H. Martin who was elected on December 1,
1954 and resigned on October 26, 1965. Of the employees who held
senior posts only A. McLeish, who finished as vice-president in charge of
operations of Atlantic, and David Davidson, the secretary, were con-
cerned with the company in the early days, and McLeish was there when
Davidson came to it at the end of 1953. Both Martin and Davidson
gave evidence before the Commission but it is to Davidson, who also
prepared a lengthy account of his experience with Atlantic for the benefit
of the Commission, that it owes much of its knowledge of the early
period of the company's development.
David Davidson
David Davidson was born in Scotland in 1906 and, after completing
his secondary education and attending evening classes at the Glasgow
Atheneum, he emigrated to the United States in 1929, being employed
in Chicago by the Peoples Gas Light & Coke Company. Here he did
accounting work until 1940, finally being responsible for preparation
of financial statements and compliance with the regulations of the
United States Securities and Exchange Commission in connection with
the issue of securities. While employed by this company he obtained, by
attending evening classes at Northwestern University, a diploma in
commerce in 1934 and, at the John Marshall Law School, a bachelor-of-
laws degree in 1938, thereafter passing the bar examinations of the
States of Illinois and Wisconsin. In 1940 he joined the Carnegie Illinois
Steel Corporation in Pittsburgh, Pa. as a senior auditor and was there
engaged substantially on special accounting in relation to the limitation
of profits on war contracts. In 1948 he went to work as an auditor for
the Steel Company of Canada in Hamilton, Ontario, becoming respon-
sible for internal legal and taxation work and remaining there until
1953. In either 1949 or 1950 he first met C. P. Morgan at the Roseland
Park Country Club in Burlington where they were both members. After
he left the Steel Company, and after a brief period of employment with
Dominion Tar & Chemical Company Limited in Montreal, he was
engaged by Morgan to review the accounts receivable of the infant
Atlantic Acceptance Corporation and thereafter became a permanent
employee until he was released by the receiver and manager on April
30, 1966. At the end of a year he made his report to Morgan on the
state of the company's accounts receivable and it was not favourable,
Davidson going so far as to say that in his opinion the company was
insolvent if any realistic allowance for losses were made. No doubt as
a result of this report on February 15, 1955 he replaced one Clarence
39
Early Days
Gott as general manager and assistant secretary of the company, retain-
ing these positions until late in 1958 when he became in turn secretary-
treasurer and secretary alone in 1964. Shortly after his appointment as
general manager International Silver moved its offices to Niagara Falls,
Ontario, and Morgan's operation of Atlantic was necessarily confined
to flying visits, so that Davidson had a fairly free hand.
Problems of Profitability in the First Five Years
The early history of Atlantic Acceptance occupies a well-defined
period of time between the commencement of its operations in 1953
to the end of 1958, by which time C. P. Morgan had left the service
of the International Silver Company under circumstances which will be
referred to later, and had taken over on September 1 of that year the
full-time operation of the company as president. It is not proposed to
describe its activities in detail in this period, other than to notice those
developments which were vital to the growth of the company and the
employment of certain techniques which generally appear to be normal
to the operation of all finance companies, and which, in at least one
instance, did not conform to the usual practice and produced a significant
distortion of the company's published financial statements as a result of
the personal intervention of its president. The sales finance business is
often described, in the current cant phrase, as "a service industry",
meaning that it is not productive as to goods but only as to the service
of lending money. The simple premise upon which a finance company
exists and flourishes is its ability continuously to borrow money and
thereafter lend it at a rate which secures to it from year to year an
acceptable margin of profit. To be acceptable this must not only produce
a reasonable and competitive return on the funds which have been
invested in the company by holders of its shares but must be sufficiently
impressive to attract additional investment in competition with similar
institutions. No doubt a situation could be envisaged where a finance
company, having achieved a certain volume of business, could elect to
maintain a static position, neither increasing nor reducing the scale of
its borrowing and lending, but in practice the most skilful regulation
would be required to make it materialize. A moneylender must be
prepared to lend money to all comers who are qualified borrowers,
particularly in an economic climate such as that of the late 1950's
when hothouse growth was not unusual and the demand for money was
insistent. Any setback, such as would impair the capital invested
in a finance company, might have the effect of thrusting it far
back not only in the race for achievement but in the struggle for
survival. Its assets are, for all practical purposes, its accounts receiv-
able, or its expectation of repayment with interest of the money it has
lent. All these things must be borne in mind when considering the
40
Chapter II
history of Atlantic and the motives which animated its promoters and
particularly its president.
The mechanics of the company's financing, the sources of its
funds, the limitations imposed upon its borrowing by the provisions of
the trust deeds to which it was a party and its lines of credit with the
chartered banks have been exhaustively analysed and commented upon
in the evidence given before the Commission and principally by the
Commission's auditors. The consolidated balance sheets and income
statements of Atlantic and its subsidiaries, prepared from the published
financial statements of the company from the year ending June 30,
1954 to the year ending December 31, 1964, appear as Table l.1
This, with many other analytical accounting documents, was put into
evidence by Mr. Orr on the first occasion when he testified at length
on March 7 and 8, 1966.2 It shows that from the fiscal year ending
June 30, 1954 to that ending December 31, 1958, a period which was
effectively covered by Davidson's active management and Morgan's
absence in Niagara Falls, growth occurred in accounts receivable from
$1,226,202 to $3,240,069 and in profits (net income earned) from
$14,700 to $48,391. At the year-end June 30, 1955, they showed
their only decline from the figure of a previous year in the company's
history, and this, no doubt, was a result of the almost total involvement
in the financing of television sales and Davidson's pessimistic review.
Indeed, according to Davidson, C. P. Morgan's principal concern
with the company's affairs at this stage was the production of a financial
statement which would reflect a profit of such order as to encourage
investment and justify payment of a dividend on the preference shares.
Throughout the eleven years in which it published such statements it
never failed to show a profit which increased from year to year, rising
by the end of 1964 to a figure of $1,100,004. Both Davidson, from
his knowledge of the early years, and McFadden, of the later years,
testified that Morgan himself fixed the amount reserved for bad debts
mainly as a factor in determining profits and the earnings per share of
the issued stock. If Davidson thought that the company was insolvent
by virtue of the quality of its receivables in 1954 it will be shown
hereafter that it was operating at a loss by the end of 1963, and perhaps
earlier, upon any rational basis of making allowances for bad debts
according to generally accepted accounting principles. However, let it
suffice that Morgan, with no experience of the workings of finance
companies, from the beginning asserted his control over this aspect of
its affairs.
Another factor in determining the amount of profit recorded year
by year must here be noticed. In what are generally referred to as
consumer loans, involving the financing of the purchase of a chattel
'Exhibit 542.
'Evidence Volumes 5-6.
41
Early Days
under the terms of a conditional sales agreement, the borrower under-
takes to pay a sum which includes not only the principal amount but the
interest payable thereon computed over the life of the contract. The
portion of this sum representing pre-computed interest is known as the
service, or finance charge, and the method by which this is taken into
income year by year and the remainder deferred to subsequent years
has a particular bearing on the amount of profit that can be shown by
any finance company. From the evidence of Davidson and from
that of C. P. Morgan3 Atlantic, subject to exceptions and refine-
ments which will be noted hereafter, originally used the sum-of-the-
digits method or, as it is sometimes called, the "Rule of 78ths" to
calculate the portion of the blended payments to be taken into income
over the life of the contract, after deducting 40% of the service charge as
the "cost of acquisition" and carrying the remaining 60% in its deferred
income account. The sum-of-the-digits computation acquires its sobri-
quet of "Rule of 78ths" from the fact that the separate numbers taken
from 1 to 12, as in the case of a 12-month contract, add up to 78 and in
the first month of the contract the proportion of i:?7s of the revenue
deferred is taken into income, followed in the second month by lxAs, in
the third month 10/78 and so on in descending order. This method is in
frequent use but, fortunately for the stability of the finance company
business, the practice of deferring only 60% of the service charge is
not. It will be readily understood that the immediate taking into income
of 40% means either that the cost of acquisition is very high or that the
proportion deferred is designedly low, with a view to giving the highest
possible stimulus to current earnings. Morgan's adoption of this course
of calculating income from contracts where pre-computed interest was
a factor created problems involving over-payment of income tax and
eventual drastic adjustments when electronic computers were brought
to bear on his companies' accounting, and if they had survived to enter
a season of reduced expansion they would have suffered a disastrous
decline in earnings. Yet the system had decided advantages as a
promotional device at a time when the main preoccupation of manage-
ment appears to have been to attract capital investment in a period of
unprecedented expansion and optimism. Coupled with the understate-
ment of allowance for bad debts it produced the illusion of rapid and
continuous growth. It must be noted that Davidson's evidence, both on
oath before the Commission and in his "historical and financial review"
on file therewith, alleged that Morgan had abandoned the sum-of-the-
digits calculation for retail accounts when it became apparent that it
was not producing sufficiently large profits in a current year. He refers
to a running battle between Morgan and the company's auditors for the
first ten years of its existence, Wright, Erickson, Lee & Macdonald, who
consistently pressed for a more realistic reservation against bad debts
•Exhibit 3799.
42
Chapter II
and for unearned interest, and who, in the course of an "annual
wrangle" with Morgan, were successful only to a very limited extent.
John Edward Lee, C.A., the partner in charge of the audit up to and
including 1963, testified that the Rule of 78ths was not fully applied
until that year except in the case of industrial loans, and that the com-
pany simply selected a percentage of the outstanding retail "paper" at
the end of each year as an appropriate reserve, using as an excuse
that the rule required too much clerical work.4 Morgan appeared
content to accept an unnecessarily heavy income tax liability pro-
vided that the net income after taxes should be sufficiently large
to justify payment of dividends and to show a consistent growth
in terms of earnings per share, in order to attract new capital and
particularly the purchase of long and short-term notes.
Early Financing
The early financing of Atlantic Acceptance was undertaken by the
issue of preference and common shares and the obtaining of credit from
the Bank of Toronto in Hamilton, with such additional accommodations
as will be referred to hereafter. Originally authorized were 20,000
common shares without any nominal or par value and 5,000 preference
shares each with a par value of $20, of which all but 5,000 common
shares had been issued by the autumn of 1953 for an aggregate con-
sideration of $100,000, according to recitals in the by-laws of the
company, but for $ 1 1 1 ,000 according to the record of share trans-
actions contained in the minutes of meetings of the directors.1
From an examination of the records referred to and the prospectus
dated February 16, 1953 it appears that pursuant to an underwriting
agreement dated February 4 between the company and Fleetwood
Financial Corporation Limited of Toronto, a company in which the
dominant figure was one C. J. Foran, it was provided that Fleetwood
would buy 1,100 units consisting of five preference shares and five
common shares for $101 per unit, the company to pay Fleetwood a
commission of $1 1 per unit, thus securing a net of $90 per unit for the
treasury. Davidson's recollection is that Fleetwood was not particularly
successful in its efforts to dispose of these units, and that thereafter
Morgan relied on his own efforts and those of Carl T. Bastedo, a sales-
man in Hamilton for the brokerage firm of A. F. Francis & Co., who
became a director of Atlantic on June 9, 1953. In any event the
proceeds of the sale to Fleetwood, together with that of 5,005 shares
taken up by the directors and 4,995 by G. Warren Armstrong, a
Toronto solicitor who incorporated the company, at $1 each, put an
aggregate of $100,000 in the treasury.
From the beginning Atlantic Acceptance's principal bankers were
the Bank of Toronto, to become, by merger in 1955 with the Dominion
'Evidence Volume 79.
"Exhibits 17 and 22.
43
Early Days
Bank, the Toronto-Dominion Bank, and, although branch offices and
subsidiary companies had accounts with other chartered banks, the
Toronto-Dominion Bank was to retain the leading position throughout
Atlantic's active life. There credit was obtained by pledging the com-
pany's accounts receivable as security with the bank in Hamilton in the
proportion of 115% of the amount borrowed against them. The bank
required that any accounts which were delinquent for a period of
sixty days or more must be withdrawn from deposit and David-
son's evidence2 was to the effect that this was done where there
was sufficient collateral on deposit to preserve the required ratio,
but where this was not the case delinquent accounts were not with-
drawn. The bank, he said, conducted only a superficial inspection once
or twice a year by sending an assistant manager and a girl to the
company's office at 66 King Street West who, apart from determining
the unpaid balance as shown on the accounts receivable cards, paid
little attention to the degree of delinquency of any particular account,
and that, at least in the period of the company's principal activity in
Hamilton, no complaints were made against the pledging of delinquent
accounts as security, probably because the bank was unaware of their
true state. The minutes of a meeting of the board of directors on
September 29, 1953 contain an announcement of the bank's intention
to increase its line of credit to $250,000 in the event of the introduction
of $100,000 new capital and, as a result, supplementary letters patent
were obtained increasing the common shares by 45,000 to an authorized
total of 50,000 with no par value and the preference shares by 10,000
for a total of 15,000 authorized at a par value of $20. Of these by far
the greater part were taken up equally by Morgan and Bastedo, then
the company's treasurer, and it must be assumed sold to members of the
public. Morgan, on his own showing, retained between 15% and 20%
of the company's voting stock throughout this period, and perhaps as
much as 25% if Davidson's recollection is to be trusted. By June 14,
1955 the board thought fit to pass a resolution declaring 15,000 prefer-
ence shares and 50,000 common shares as non-assessable and fully paid
for a consideration of $300,000 and $30,000 respectively, "the directors
acting in good faith."3
Two Chance Encounters: J. A. Medland and C. G. King
Two important transactions in the history of the early financing of
Atlantic must now be noticed. They were both fortuitous and one at
least was to have momentous consequences. One of Morgan's associates
at Price, Waterhouse & Co. was John Aubrey Medland, a graduate of
the University of Toronto in Commerce and Finance, a sometime student
at Cambridge University, and, of course, a chartered accountant. Morgan
'Evidence Volume 78.
'Exhibit 17.
44
Chapter II
and Medland left Price, Waterhouse & Co. at about the same time, the
former to go to Loblaw Groceterias as assistant comptroller and the
latter to take over the direction of Culverhouse Canning Company, a
family business. From a chance encounter in a Hamilton brokerage
office Medland learned from Morgan of his new enterprise and how this
had developed from the scheme propounded to the International Silver
Company. The date of this meeting is uncertain. Medland in his evidence
before the Commission1 hazarded 1956 or 1957. Counsel put to him
that it must have been in 1955, because he became a director of Atlantic
for the first time on June 27 of that year, remaining until the annual
meeting on September 23 when he was not re-elected. It is more prob-
able that the meeting was in 1954, because the minutes of a meeting of
the directors dated May 22 in that year announced Medland's retention
as financial adviser to the company at a salary of $500 per month. In any
event, as a result of this conversation and of Morgan telling him that the
business was showing signs of success but needed money to tide it over a
current difficulty, Medland pledged $50,000 worth of his own securities
with the Bank of Toronto on the strength of which it lent Atlantic an
additional $200,000. Medland's salary was contrived to represent the
difference between the bank rate of 5% and a rate of 8% on the money,
which Morgan expressed his willingness to pay. If the minute of May
1954 is accurate the rate of 8% is justified by that crisis in the affairs
of the infant company which was revealed by Davidson's analysis of the
accounts receivable, then some months under way. The election of
Medland and Ramsey A. Evans, Q.C., the company's solicitor, on June
27, 1955 occurred at a special meeting of shareholders on that day
after it had been resolved to increase the number of directors from five
to seven. Medland was not re-elected at the annual meeting of the
company held on the following September 23 and, on further examina-
tion of the transactions of June 27, it becomes clear that the company's
obligation to him was on the point of being discharged.
The second and even more significant encounter also took place
at some time in 1954, according to the evidence given by Carman
George King, vice-president of the bond-dealing firm of Annett & Co.
Limited and the stock-broking firm of Annett Partners Limited, both with
headquarters in Toronto. King was also a graduate of the University
of Toronto in 1931 in Commerce and Finance, and had been employed
by investment firms dealing in bonds up until the time when he joined
the Royal Canadian Navy during the last war. On discharge he was a
member of the firm of Saunders, King & Co., in the same business in
Toronto, until in 1953 this partnership was dissolved, and he joined
Gairdner & Co. where he became resident manager of that firm's office
in New York. In 1958 he joined D. R. Annett in the business with
'Evidence Volume 92.
45
Early Days
which he is still associated.2 It was during King's employment in New
York that he first heard of Atlantic Acceptance, and he told the story
thus in answer to questions put to him by Mr. Shepherd:3
"Q. Mr. King, you have testified on an earlier occasion respecting your
own history in business and the like. Would you inform the Commis-
sion under what circumstances you first came to have any connection
with Atlantic Acceptance Corporation Limited?
A. Well, I was working in Gairdner & Company in New York and
came up to Hamilton on a visit, my mother lived there and I came up
to see her, and I was walking down James Street and, I think it would
probably be in front of the Piggott Building, I met a fellow by the name
of Carl Bastedo.
Q. When would this be?
A. This would be, I believe, in the summer of 1954.
Q. Yes?
A. Carl was a stockbroker and bond dealer in Hamilton with A. F.
Francis & Co. and he and I had known each other ever since school
days. And we got talking about stocks and bonds and he said they had
started a finance company in Hamilton the previous year called Atlantic
Acceptance. And in view of the fact we had just financed Laurentide
Acceptance in New York successfully with secured notes, and also the
fact that we had a lot of customers and brokers in New York that were
enthusiastic about finance companies' stocks, I made some enquiries and
asked him for the original prospectus and the annual report.
Q. Yes?
A. And I took it back to New York and found out that there was
5,000 shares of stock available at $3 that had gone to one of the
original people in the company, and subsequently acquired the stock
through Gairdner & Company from Francis. And, then, in discussing
the problems of this company Carl had mentioned they were more or
less stymied, they had sold about $300,000 worth of preferred with a
bonus of common and they had a limited fine of credit at the bank, that
they needed more money, and I finally interested Lambert & Company
in the idea of buying $300,000 convertible debentures, which they
bought from Gairdner & Company, for one of their Toronto companies.
Q. When you say 5,000 shares of stock at $3 was acquired, did you
acquire it personally or did Gairdner's acquire it or was it acquired
for clients of the firm?
A. It was acquired as a brokerage transaction through Gairdner for
myself and clients.
Q. Then, you spoke of Lambert. And would you continue from there?
A. Well, Lambert & Company were customers of ours, we had interested
them in a gas utility company in 1951, and we did a lot of brokerage
business for them.
•Evidence Volume 43.
'Evidence Volume 93, p. 12573.
46
Chapter II
Q. With whom did you deal at Lambert?
A. Principally Mr. Christie.
Q. How long had you known him?
A. I had known Mr. Christie since university days, in 1928.
Q. Continue, please.
A. The convertible debenture issue, in effect, gave Lambert & Company,
through Consolidated Toronto, control of Atlantic.
Q. That is, if they exercised their right to convert into shares they would
control the company?
A. Yes. And this transaction was completed in Toronto through the
underwriting department of Gairdner & Company.
Q. Up to this time had you met Mr. Morgan?
A. I can't say that I had. I am not sure. I may have met him on one
occasion but I didn't know him.
Q. Did you first meet him in New York or was it after your return to
Toronto?
A. I probably met him in Toronto, possibly at the time they closed this
convertible debenture issue. I may have come up for it because sub-
sequently he opened an account with Gairdner & Company and we
did some stock transactions for him and I occasionally called him from
New York and bought and sold some securities for him. So it is possible
that I met him at the closing of the convertible issue."
The Advent of Lambert & Co.
Atlantic's records show that the first arrangements for launching
this issue of debentures were made at the directors' meeting of June
27, 1955, which has been referred to. On that occasion $300,000
worth of twenty-year, 5Vi%, convertible debentures were created and
their sale authorized to Lambert & Co. of New York on the assumption
that supplementary letters patent increasing the capital of the company
would be issued, dated the same day.
Forty-six thousand shares were set aside for the conversion of the
debentures which was provided for at $6.50 per share on or before
July 2, 1960, the rate to increase $1.00 per share per year until 1964.
The payment of a fee of $15,000 to Gairdner & Co. for finding Lambert
& Co. as purchasers was also resolved upon. This transaction, which at
one stroke virtually doubled the capital investment in Atlantic Accept-
ance, was pregnant with consequences for the future. The shares
provided for converting the debentures put the purchasers in a position
to call for control of the enterprise. The next meeting of directors, on
August 24, passed a resolution to apply for listing the company's
common and preference shares on the Toronto Stock Exchange. At the
annual meeting held on September 23 two new directors were elected
47
Early Days
replacing Medland and Evans. They were D. B. Mansur and A. C.
Rooney, respectively president and secretary of Consolidated Toronto
Development Corporation Limited, a company which owned the valu-
able Home Smith properties on the western outskirts of Toronto and
since 1953 had been controlled by Lambert & Co. of New York.
Lambert & Co. was a partnership engaged in the investment of
capital with offices at No. 2 Wall Street and may be described loosely
as an investment bank or, in the continental phrase, a "banque d'affaires",
not a deposit-taking institution or otherwise engaged in normal banking
business. It was established in 1 950 by Jean Lambert, who was born in
1920 in Saarbrucken in the mandated territory of the Saar, and was
thus only nineteen years of age when war broke out in 1939. The
armistice concluded between Germany and Marshal Petain's de facto
ministry in 1940 occurred just prior to the date of his call-up for service
in the French Army, and leaving Paris ahead of the invading Germans
he escaped southward to Bordeaux. Armed with a United States visa
and imbued with a desire to join the Free French movement in London,
he found his way via North Africa to Lisbon after a brief spell of
imprisonment in Madrid, where he was advised that since he had a sister
in the United States he should proceed to that country and make himself
available to the Free French delegation there. In Washington he
became attached to the Free French purchasing mission, subsequently
attending the international monetary conference at Bretton Woods and
the San Francisco Conference where he made the acquaintance of
politicians who were to become influential in post-war France. There-
after he held himself out as a consultant in international financial and
economic affairs and travelled extensively in Europe and South America.
His marriage to Phyllis Bronfman, daughter of Samuel Bronfman of
Montreal, president of Distillers Corporation-Seagrams Limited, occurred
in 1949.
It should be noted that all the information about Lambert used
here, not otherwise furnished by his partners, is derived from the
evidence given by him on oath to the Securities and Exchange Com-
mission in an examination conducted in New York by Peter J. Adolph
of the Division of Trading and Markets on December 3 and 8, 1965.1
At the conclusion of that examination he expressed his willingness
to testify before the Royal Commission but, on being invited by counsel
to do so at a later date, said that he had nothing to add to the testimony
given on that occasion. He described the efforts made by his influential
and wealthy father-in-law to coax him into one of the Bronfman
enterprises which, he said, he resisted to maintain his own independence.
Finally, on the advice of Alan Dulles, a senior partner of the well-
known New York law firm of Sullivan & Cromwell, whom he had
met at San Francisco, he admitted his wife into limited partnership,
Exhibits 2472-3.
48
Chapter II
she supplying $1,000,000, $900,000 of which was her own investment
and $100,000 which she lent to her husband and which was in due
course repaid. Thus, in 1950, Lambert & Co. was born.
Lambert said that his first general partner was Alan Thomas
Christie who joined him in the same year. Oddly enough, Christie
himself, in the course of his extensive evidence given to this Com-
mission,2 says that he was not admitted to partnership until two
and a half years later but, since the general partners were only
required to invest $5,000 as a condition of joining the firm, the
conflict of evidence is of no consequence. Christie was born in Hamil-
ton in 1905, just sixty years before the date of the default of Atlantic
Acceptance. He, like King, was a graduate of the University of Toronto
in Commerce and Finance and later of the School of Banking at
Rutgers University in the United States. After a brief period with the
City of Toronto he entered the investment department of the Sun Life
Assurance Company in Montreal in 1930 and remained with that
company until 1943 when he went to New York to join the Bank of
New York as a security analyst, thereafter becoming an assistant vice-
president of that institution. Here he became acquainted with and, to
some extent, specialized in the affairs of finance companies and their
credit problems. Here also he became a friend of one of his colleagues,
Harvey Mole, soon to leave the Bank of New York and join the United
States Steel and Carnegie Pension Fund of which in due course he
became president. Here finally, through mutual connections in Sullivan
& Cromwell, he met and joined Jean Lambert, now thirty-one years old.
Lambert, as the managing partner of Lambert & Co., had five
general partners, Christie, A. C. Maher, Paul C. Sheeline, Gay V. Land
and Pierre J. Lelandais. Christie mentions a Mr. Vautravers, and
Lambert a Mr. Norman, both of whom resigned early in the part-
nership's history, and both of them refer to one Russell Cissel who died
after coming to the firm from Sullivan & Cromwell. Of the surviving
partners all but Maher were examined by the Securities and Exchange
Commission in New York and Christie before the Royal Commission
here. Of those examined all but Christie were younger than Lambert;
two, Lambert and Lelandais, were born in France and Sheeline was
brought up there; Sheeline and Lelandais were graduates of Harvard;
and Sheeline, like Cissel, served his apprenticeship with Sullivan & Crom-
well. Land was a chemical engineer and was invited to join the firm
as a partner because of his experience in the oil industry. Christie
pre-eminently, and all of them played a part in the affairs of Atlantic
Acceptance. At the outset two large transactions involving participation
by Lambert & Co. with the international investment banking house of
Lazard Freres, the details of which it is not necessary to elaborate upon,
established the firm's reputation as successful intermediaries in the field
2Evidence Volume 91.
49
Early Days
of international finance. The first involved the reorganization of a
substantial but unenterprising Scottish firm into fifteen American cor-
porations and the second involved the merger of a number of Alberta
oil companies. In 1952, at a time when Lambert was establishing
Lambert & Cie. in Paris, he and his wife separated and were subse-
quently divorced, but Mrs. Lambert remained a limited partner in the
firm on the same basis as before, and, in spite of her predominant
investment, never played an active part in its management or affairs.
The next step in its fortunes was the acquisition of an interest in
Consolidated Toronto Development Corporation through the interven-
tion of an English banking firm, an interest which was subsequently
developed into 90% ownership of a company which held valuable
undeveloped property.
To manage this important acquisition, which according to him had
cost his firm upwards of $5,000,000, Lambert appointed as president
David B. Mansur C.B.E., a distinguished Canadian public servant
who had been a contemporary of Christie in the service of Sun Life
Assurance Company before the war, had held important offices in the
field of wartime finance in Ottawa and had been from 1946 to 1954
president of Central Mortgage & Housing Corporation. For the next
six years Mr. Mansur was the man on the spot for the Lambert
interests which he handled by all accounts with the greatest competence
and universal approval until his resignation in 1960 when his responsi-
bilities were assumed by Alan Christie. Although Mansur and Rooney,
as has been seen, were elected directors of Atlantic Acceptance in
September, 1955, the $300,000 in debentures purchased in June of
that year remained in the hands of Lambert & Co. until April 24, 1958,
and then were sold to Consolidated Toronto Development Corporation
and thereafter converted into common shares before the first conversion
date.
The Flying Tiger Deal
The next important transaction for Atlantic Acceptance in which
Lambert & Co. played a decisive part involved the purchase of two
Douglas DC4E aircraft from a Californian airline known as the Flying
Tiger Line Incorporated, and their re-sale to Pacific Western Airlines
Limited in Canada. Christie in his evidence went fully into the origins
of this deal which, in Davidson's opinion, saved Atlantic from insolvency.
Pacific Western Airlines in 1957 were being substantially financed by
the Industrial Development Bank, an emanation of the Bank of Canada,
and had a contract with the appropriate authority in Washington for
supplying transportation to and from the installations of the Distant
Early Warning Line in north-western Canada. The initial approach was
made by the treasurer of the Flying Tiger Line to the Bank of New
York which directed him to Christie. Since the civil aviation authorities
50
Chapter II
in Canada insisted on domestic ownership of the aircraft, and since it
was the policy of the Bank of Canada, at a time of what Christie
described as "very tight money", not to make funds available for the
purchase to be made in the United States, negotiations between the
parties were at a standstill. In order to provide that title to the aircraft
be held in Canada, it was arranged that Atlantic Acceptance would buy
them from the Flying Tiger Line for $1,170,000 and sell them to Pacific
Western Airlines for the same price, to be paid for by $200,000 in
cash and $970,000 secured by two conditional sales agreements provid-
ing for repayment over a period of 30 months, together with interest at
VA% per month or 15% per annum. Christie persuaded the Bank
of New York to lend Atlantic $324,000 U.S. at 5Y2 % secured by non-
convertible debentures, and the balance of $625,000 was supplied by
Lakeland Natural Gas Company Limited, which received Atlantic deben-
tures in that amount bearing interest at 9%, a rate which he said was
competitive at the time in the short-term money market in Canada. The
necessary debentures were authorized by the directors of Atlantic on
August 26, 1957 and the transaction was successfully completed, result-
ing in a substantial profit for both Atlantic and Lakeland, although
Atlantic was obliged to remit one-fifth of their 15% interest to Lambert
&Co.
Two comments should perhaps be made on Christie's evidence with
respect to this transaction. He was at pains before the Commission to
repudiate the suggestion made in the press that Lambert & Co. exercised
any control over the activities of Lakeland. He admitted that Lambert
& Co. had a minor interest in Great Northern Gas Utilities Limited,
which in turn had a small interest in Lakeland, and that Lambert & Co.
had assisted Lakeland in some financing, as a result of which he knew
that the latter company had unemployed funds to spare. Nevertheless,
of the seven directors of Great Northern Gas Utilities three were
Christie, Mansur and Carman King, and Sanford Reis was president
of Great Northern Gas Utilities and vice-president of Lakeland. No
doubt the expedients favoured by Lambert & Co. were not to be ignored
by either of these Canadian corporations. Again, Christie asserted that
it was the wish of the Lambert firm to enable the few remaining minority
shareholders of Consolidated Toronto Development Corporation to
participate in its Canadian enterprises and thus Atlantic Acceptance was
selected to derive the advantages attendant upon the aircraft transaction.
According to Christie's own evidence Consolidated Toronto Develop-
ment had at this time no interest in Atlantic Acceptance, and if the
statement is to be given any weight it must indicate that the transfer of
Lambert & Co.'s interest in Atlantic to Consolidated Toronto Develop-
ment was contemplated many months before it actually occurred.
Information published in the Financial Post's "Survey of Industrials"
51
Early Days
indicates that Great Northern Gas Utilities purchased a 33*/3% interest
in Lakeland in 1954.
Lambert & Co. Quicken the Pace
Mr. Christie's life-long friend and personal broker, Carman G.
King, has testified1 that Lambert & Co. were disappointed in the
immediate progress made by Atlantic Acceptance after their purchase
of debentures in the amount of $300,000. He assigns as one reason
the inability of the company to sell secured notes because of its
insufficient record of continuously paying annual dividends on its
shares as required by the Canadian and British Insurance Companies
Act.2 By 1959, in fact, the company had paid five consecutive annual
dividends on its preference shares of $1.10 per share and thereby
secured the qualification. A quarterly dividend of 10£ per common
share was first declared in 1960.
But the pace of expansion was not fast enough, and in the course
of 1958 Lambert & Co. made two decisions as to the immediate future
of Atlantic. If the company could not borrow by the now fashionable
method of issuing secured notes it must have more "equity", or in other
words a greater sale of its capital stock. To avoid loss of their own
preferred position consequent upon the convertibility of their debentures
this should be done by offering "rights'' to the existing shareholders to
acquire the balance of the authorized common shares hitherto unissued.
Secondly, they felt that Powell Morgan, whose management, as we have
seen, was confined to telephone calls from his headquarters in Niagara
Falls and increasingly rare appearances at the elbow of Davidson, should
devote his full time to Atlantic. Both these decisions were acted upon.
The resolution to offer rights to common and preference share-
holders and the holder of the 1955 debentures was passed by the Atlantic
directors on June 16, 1958. At this meeting it was recited that of the
115,000 authorized common shares 53,800 had been issued, as had all
of the 15,000 authorized preference shares, the balance of 61,200
common shares being held for the event of conversion by holders of the
debentures and preference shareholders. The offer was to be made, to
all shareholders of record on August 15, 1958, of the right to purchase
one share of common stock for each share held, common or preference,
at the price of $5.00, and to the holder of the 1955 debentures, by this
time Consolidated Toronto Development Corporation, of one common
share at the same price for each $6.50 of debentures held. At the same
time, and to make the necessary stock available, it was resolved to
increase the authorized number of common shares by 250,000 to a total
of 365,000, not to be issued for more than an aggregate value of
$2,000,000. At a subsequent meeting on September 12 the president
'Evidence Volume 93.
'R.S.C. 1952, c.31.
52
Chapter II
reported that by September 10, the last date for exercising them, all
rights permitted to the debenture holder had been taken up, the preferred
shareholders had assumed 7,825 shares and the common shareholders
98,554 shares, for a total accretion to the treasury of $531,895. It was
then further resolved that the balance of 8,574 shares, in relation to
which rights had not been exercised, would be offered, with the approval
of and consequent listing by the Toronto Stock Exchange, to Con-
solidated Toronto Development Corporation. It will now be seen that
this corporate vehicle of Lambert & Co. as a result owned, or had pre-
empted by option, a total of 100,900 shares in the round from the two
transactions which have been recorded here, or roughly 40% of the
equity of Atlantic.
The condition attached to Lambert & Co.'s participation in this
infusion of capital was that Morgan should cease his one-handed opera-
tion of the finance company and leave his employment by International
Silver to devote all his time and energies to Atlantic. All the Lambert
partners examined have testified to their confidence in Morgan's
integrity and ability to make the company move. Accordingly, with
effect from September 1, 1958 Morgan assumed full management and
executive control of Atlantic's affairs. At a meeting of the board held
on October 14, at which Mansur presided, approval was given to his
employment contract as set out in a letter dated August 183 at a
salary of $25,000 per annum for a period of five years. He also
obtained from the company an option to purchase 15,000 of its common
shares, exercisable as to five lots of 3,000 shares each in overlapping
biennial periods from September 1, 1959, to August 31, 1965, at a price
of $5,375 per share. By this time, it may be supposed, both Mansur
and Rooney must have been able to make some assessment of Morgan's
quality and they must have shared, if indeed they had not to some
extent inspired, the confidence in him asserted by the Lambert partners.
They could not know that the one-handedness with which he had
hitherto managed Atlantic was inveterate. Rooney, as a chartered
accountant, was deputed to make inquiries about Morgan from his old
employers at Price, Waterhouse & Co. and there learned nothing to his
discredit. Christie apparently made no inquiries and was not aware of
any being made. It is a measure of the self-confidence of Morgan's new
sponsors that they did not think it worth while to ask the Inter-
national Silver Company, directly or indirectly, as to how he was
regarded. Perhaps when Morgan sought permission to remain as a
director of International Silver after leaving its employ, and secured
it from the Atlantic board, their attention was diverted from these
ordinary precautions. The Commission has, however, been advised by
John B. Stevens, the current president of the International Silver Com-
"Exhibit 20.
53
Early Days
pany of Meriden, Connecticut, in a letter dated November 23, 1966, in
the following terms:
"From all we can determine he handled his work for the International
Silver Company efficiently and most of the time he spent on the business
of the Atlantic Acceptance Corporation was after hours and on
weekends.
The cause of his dismissal in 1958 was his handling of one of our
accounts receivable, namely, Associated Housewares Distributors
Limited. He permitted an indebtedness to the company on the part of
Associated Housewares of $151,000 and when the company went into
bankruptcy this turned out to be a complete loss for International.
A creditors' committee for Associated Houseware was formed in July
1958.
Actually this was the final straw in a series of events which
indicated Mr. Morgan had been getting much too independent and
difficult to tie down in answering specific questions or doing specific
assignments."
The trustee of the bankrupt estate of Associated Housewares Dis-
tributors was William Louis Walton, C.A. whom Morgan met for the
first time over his employer's claim. From this encounter important
consequences were to flow.
Subsidiaries and Branch Offices, 1953-1958
The severance of Morgan's connection with the International
Silver Company marks the end of a period of modest and, indeed,
precarious growth in the history of Atlantic Acceptance and the
beginning of an era of abnormal expansion of the company's activities.
It is desirable to pause here to record a number of decisions which had
already been made with a view to diversifying its operations, and par-
ticularly to acquire a foothold in the field of automobile financing which
is the backbone of most acceptance companies' business. It has been
seen that Atlantic broke into a highly competitive field by providing
accommodation for dealers in television sets who were marketing, with
more enthusiasm than prudence, a product which could not compete in
the long run with that of established manufacturers. The "Coronet"
television set was largely sold in the Hamilton area and in the Niagara
Peninsula. The "Premier" set was distributed from Ottawa and it was in
Ottawa that Atlantic's first branch office was established on August 1,
1954.1 In June the following year a second branch office was
opened in St. Catharines, Ontario to enlarge the company's opera-
tions in the heavily industrialized Niagara Peninsula,2 but by the end
of 1958 only one more had been added, in Kingston, Ontario. The
presence of Ernest A. Lindley, an automobile dealer in Dundas,
'Exhibit 33.
'Exhibit 17.
54
Chapter II
Ontario, and his appointment as secretary of the company might
have been expected to produce the badly needed entree to motor
vehicle financing, but Lindley proved unexpectedly attached to a con-
nection with the long-established and ubiquitous Industrial Acceptance
Corporation whose withdrawal from the financing of furniture and appli-
ances in the Hamilton area produced an accession to Atlantic of
additional accounts receivable of the type which it was not particularly
interested in acquiring. Eventually an agreement was reached with
Lindley in January 1956, no doubt facilitated by a loan of $28,000
secured by a mortgage of certain property cast in the form of an agree-
ment for sale, with regard to which, according to Davidson, Ramsay
Evans had raised strong objections as to the propriety of making such a
loan to a director. The situation was expected to be eased by the
acquisition on June 18, 1956 of Talbot Finance Company Limited, a
small concern in St. Thomas, Ontario, for $82,890. Talbot's business
was almost equally distributed between automobile and electrical appli-
ance financing and unlike, in Davidson's view, the branch offices at
Ottawa and St. Catharines, was a profitable operation for some time
after acquisition. Its name was subsequently changed to Atlantic Accept-
ance (St. Thomas) Limited and in 1961 its charter was surrendered,
although a branch office of the parent company continued to function
in St. Thomas. A more important departure, destined to produce the
most profitable and stable operation in the consolidated affairs of
Atlantic Acceptance, was the incorporation of Atlantic Finance Cor-
poration Limited primarily to conduct the type of business authorized
under the Small Loans Act. These direct loans of cash to borrowers
were limited to amounts not greater than $1,500, were accounted for
on the simple basis of re-calculating the interest payable as the principal
was reduced and presented no opportunities for manipulating deferred
interest charges. Moreover the Small Loans Act was administered by
the Department of Insurance in Ottawa, thus providing the only govern-
ment regulation in the money-lending field in which finance companies
operated. The resolution to incorporate this company was taken by the
directors on January 13, 1956 and Atlantic Finance Corporation
Limited received its charter as an Ontario public company, dated
February 22. It did not confine its operations completely to the small
loans field and its conditional sales business was in the future to be of
significance in proportion to the whole. The company originally
functioned in the existing branch offices of Atlantic Acceptance, and
perhaps it should be noted that Davidson's recollection of the motive
behind its incorporation was to participate in the benefits of the practice
frequently resorted to by small loan companies, of lending money to
borrowers from acceptance companies for the purpose of making
payments upon conditional sales contracts or, which was less desirable,
of paying them off in advance of maturity. The employees of Atlantic
55
Early Days
Finance were, generally speaking, indistinguishable from those of Atlan-
tic Acceptance and were all paid by the parent company which charged
the operating costs back to its subsidiary.
The Horizons of 1959
The year 1959 was one of extraordinary expansion for Atlantic,
during which its accounts receivable, less allowance for bad debts, rose
from $3,240,069 (a figure only modestly higher than that published
for the year 1957) at the year-end in 1958 kT$9,279,695. The corre-
sponding increase in net income earned was from $48,391 to $152,883.
Examination of many transactions in 1959 properly belongs to sub-
sequent sections of this report so far as they are relevant to the Com-
mission's terms of reference. Two events may here be recorded which
mark, in Sir Winston Churchill's phrase, "not so much the beginning of
the end as the end of the beginning". With C. P. Morgan in the saddle,
the easing of lending restrictions by the chartered banks imposed in
1956 at the behest of the Bank of Canada,1 the expansion of the com-
pany's borrowing power consequent upon the qualification of its securi-
ties resulting from a five year consecutive payment of dividends on its
preference shares and the sanguine sponsorship of its Wall Street men-
tors, the company looked out on broad horizons. The sixth annual report
of the president to the shareholders for the year 1958 dated at Hamilton
on March 26, 1959 had, under the heading of "Profit Potential" the
following forecast to make:2
"Your company in the past has been fortunate in being able to
engage in profitable operations without the necessity of investing large
amounts in capital loans to dealers and in the wholesale purchases of
dealer inventories, each of which normally yield a low rate of return.
In like manner, reserves payable to dealers have been kept at a minimum.
With the increase of capital funds available arising principally from
the issuance of stock rights referred to above, and a substantial increase
in our borrowing capacity, your company now finds itself increasingly
competitive, however, it will, unquestionably, also find it necessary to
invest substantial funds in low yield investments with dealers and
increase reserves payable to such dealers resulting in an over-all reduc-
tion in the percentage of earnings in relationship to invested capital,
when compared with recent years. It is believed that this reduction
will be more than off-set by the increase in volume coupled with the
fact that we can reasonably expect a reduction in operating costs when
compared to volume arising from the personnel of your company being
employed at a rate closer to maximum utility.
It is planned to acquire an interest in a factoring company and a
soft goods finance company to diversify your company's interest in the
finance field.
'Report of the Governor of Ihe Bank of Canada for 1956.
"Exhibit 39.
56
Chapter II
All in all, the outlook for 1959 is bright and the profit potential for
this year, based upon our assessment of general business conditions, is
substantial. Due to the highly competitive automobile field it is our plan
to diversify our business into all fields of financing. In this way a much
greater return to the shareholders on their investment can be anticipated.
If our estimates for 1959 are realized, there is no doubt that our
hopes for a common stock dividend on some regular basis will
materialize at an early date."
The proposal to "acquire" a factoring company culminated in
fact in the creation of Commodore Sales Acceptance Limited, in which
at first Atlantic held a 5l^c interest and of which more will be heard
later. The soft goods finance company was the Premier Finance Cor-
poration Limited, a Toronto company incorporated in 1929, which
had long been in the business of financing retail purchases principally
of textiles and textile products and was acquired from Clarence F.
O'Neill in February 1959. O'Neill being retained to manage its oper-
ations which in due course changed markedly in character.
A corollary of Lambert & Co.'s insistence on Morgan devoting all
his time to Atlantic was the removal of his own office to Toronto, where
for a brief period he and his immediate staff occupied space adjacent
to the offices of Consolidated Toronto Development Corporation. Early
in 1959 these executive offices were moved to the Concourse Building
at 100 Adelaide Street West, and here they stayed during the remaining
period of Morgan's control of the company's affairs with which this report
is principally concerned. Davidson testified that the move away from
the premises of Consolidated Toronto Development Corporation was
owing to Morgan's restiveness under the eye of D. B. Mansur. During
1959 also, the head office of the company was moved from Hamilton
to Oakville where it also remained, although a change in premises to
the outskirts of that half-way house between Toronto and Hamilton
subsequently occurred. The annual meeting of shareholders on April
10 produced a radical change in the composition of the board of
directors. Carl Bastedo, Ernest A. Lindley and Norman F. Firth, three
of Morgan's closest associates in the days before the connection with
Lambert & Co. was established, were not re-elected, but were superseded
by William H. Wallace, a Lambert nominee. J. Aubrey Medland, who
resumed his place at the board after an absence of nearly four years.
and Wilfrid P. Gregory, vice-president and managing director of British
Mortgage & Trust Company. Like Alan Christie. Wilfrid Gregory had
been a friend since university days o\' Carman King and to this circum-
stance owed his introduction to Powell Morgan.
The Climax: Long-term Lending by U.S. Steel Pension Fund
By far the most important transaction in which Atlantic Accept-
ance was engaged in 1959 occurred at the end of the year and
5^
Early Days
involved the participation of the United States Steel and Carnegie
Pension Fund for which Alan Christie was responsible.1 Here his
association and friendship with Harvey Mole stood Atlantic in good
stead, as would a similar relationship with James Nicely, financial
vice-president of the Ford Foundation, in the following year. Mr.
Mole was a pioneer of the practice of making speculative investments
secured by obligations subordinated to the securities of the existing
shareholders but buttressed with warrants to purchase equity at an
advantageous price. The first mention of what was afoot in the
records of Atlantic occurs in the minutes of the meeting of the
board of directors dated October 9, with a quorum composed of
Morgan, Mansur and Rooney. Short-term borrowing by the issue of
notes payable within 365 days had already been resorted to and
discussed in the minutes of June 17, at which time a committee of
directors had been formed to explore the possiblity of long-term
borrowing from institutional investors. At the October meeting Morgan
reported on discussions which had taken place in New York "with two
or three highly responsible institutional investors who had agreed to
purchase an issue of two and a half million dollars aggregate principal
amount of subordinated debentures of the company at par." These
were to be accompanied by 15,000 common shares at $8 per share
and 10,000 non-voting convertible Class A shares at the same price,
together with warrants exercisable over a ten-year period to authorize
the purchase of an additional 50,000 Class A shares at a price of $10
per share within the following six years and $12.50 per share within
the succeeding four. A further report was made at a subsequent
meeting on November 16, attended by the three directors already
mentioned and Gregory, Medland and Wallace, as well as A. L. Beattie
of Messrs. Osier, Hoskin & Harcourt, Toronto solicitors who had
succeeded Evans as legal advisers to the company and who also
represented the interests of Lambert & Co. in Ontario. On this occasion
it was reported that the 15,000 common shares had already been issued
to the "persons committed to purchase notes" at $8 and a resolution
was passed confirming the action of the president in engaging Lambert
Management Corporation as financial advisers to the company for a
period of three years, commencing January 1, 1960, for a fee of $1,500
per month. The meeting adjourned to permit special meetings of
common and preferred shareholders to consider the special resolution
enacted by directors on October 9, and thereafter reconvened to record
confirmation of this resolution, subject to amendments made describing
the Class A shares as "second preference shares without par value to
the number of 75,000" which would participate equally in dividends
with the common shares. This protracted and important meeting of the
board was then told that, following the issue of $2,500,000 worth of
'Evidence Volume 91 and Exhibit 2469.
58
Chapter II
unsecured notes, as the twenty-year 6Vi% debentures were now
called, the company would be in a position to raise further funds by the
issue of short-term secured notes to be sold publicly rather than by
private placement, and to be secured by the lodging of notes receivable
held by the company at 115% of the aggregate principal amount of the
notes payable. For the purpose of selling these notes it was proposed
that Annett & Co. be appointed Atlantic's fiscal agent and it was
so resolved. This programme was to proceed when the financial state-
ments of December 31, 1959 were available, concluding the five-year
period of consecutive payment of dividends on the outstanding preference
shares.
The deal was closed for the United States Steel and Carnegie
Pension Fund in New York on December 17 with Morgan Guaranty
Trust Co. and the First National City Bank. Other than a reference
to these agents and the nominees of the fund, Thomas & Co. and
Schmidt & Co., no mention may be found in Atlantic's minutes of the
identity of the purchaser of its first long-term subordinated notes and
second preference shares which made available to it nearly $3,000,000
in United States funds. Davidson has recorded Morgan's elation and
the Lambert partners had every reason to feel satisfied. Where United
States Steel had led others would follow, and the ship was fairly launched.
59
CHAPTER III
Structure and Growth of the
Atlantic Group
The general appearance of Atlantic Acceptance Corporation Limited at
June 17, 1965, the date of receivership, was, as has been said, presented
to the Commission in the evidence of Mr. Orr on March 7 and 8, 1966,
accompanied by numerous charts and schedules prepared under his
direction and at the request of counsel. The records of the company,
its books of account, published financial statements and prospectuses,
all of which had been submitted to the Commission and entered in
evidence, were the principal source upon which he and his colleagues
relied, supplemented by conversations with and enquiries made from
those employees of the company considered to have knowledge of its
affairs. Its corporate structure at June 17, 1965, showing subsidiary
companies all of which were wholly-owned at the time of default, is
illustrated on the chart opposite.1 The head office of the company
at the time of incorporation in 1953 was fixed at Toronto but
shortly after was changed to Hamilton, where, as already described
in the previous chapter, for almost the first five years of its existence
its business was mainly carried on. Thereafter the head office in law
and in fact was at Oakville and executive offices were opened in Toronto
in the Concourse Building at 100 Adelaide Street West.
The Subsidiary Companies
The chart shows that Atlantic's first offshoot was Atlantic Finance
Corporation Limited, also a public Ontario company, incorporated
three years later to operate predominantly, although not entirely, in
the field of small loans and that two companies were acquired rather
'Exhibit 541.
60
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Structure and Growth
than created to extend the operations of Atlantic in established areas
of finance company business. These were the Premier Finance Cor-
poration Limited, incorporated as a public company in Ontario on
March 7, 1929 and wholly acquired on February 18, 1959 from Clarence
F. O'Neill as mentioned before, and Standard Discount Corporation
Limited, a private Ontario company, incorporated June 18, 1949 and
wholly acquired on October 25, 1961 from Samuel and Arthur Baker
who, like O'Neill, retained a managerial position. Premier Finance was
engaged at the time of its purchase by Atlantic in financing retail
purchases of soft goods and charge or budget accounts at retail stores
in the Toronto area, and Standard Discount conducted similar business.
Atlantic Acceptance (Toronto) Limited was another private Ontario
company created by its parent, incorporated on November 22, 1960,
and wholly-owned; its purpose was to take morgages of land, subject
to certain restrictions under the provisions of section 3(2) of the
Corporations Act,1 which exempted it from registration under the Loan
and Trust Corporations Act.2 Pay As You Study Plan Limited was
incorporated as a private company on November 12, 1959 to finance
student loans and Concourse Agencies Limited, a public company,
was originally incorporated on October 23, 1959 as Humbertown
Services Limited to provide credit-card facilities for shoppers at
Humbertown Plaza, a Consolidated Toronto Development Corporation
enterprise. Both of these were also wholly-owned by Atlantic, were
unprofitable throughout and represented unrealized efforts to diversify
Atlantic's business.
The remaining subsidiaries which have been referred to in evidence
as the Adelaide Street group, and by the Montreal Trust Company as
the Commodore group, were operated from the executive offices of
Atlantic at that address. Commodore Sales Acceptance Limited was
incorporated as an Ontario private company on March 4, 1959 and
differed from the others in that, after an interval of four months of
independent if not active existence, Atlantic bought only 51% of its
common stock on July 13 of the same year, and the remainder after
the lapse of over two years on May 15, 1961. It, in turn, had a wholly-
owned subsidiary, Commodore Factors Limited, incorporated in the
State of New York on January 9, 1961, and both companies were
created for the purpose of "factoring" accounts receivable. "Factoring"
is a word bearing a special meaning peculiar to the vocabulary of North
American trade, and must be carefully distinguished from any associ-
ation with the word "factor" as known to the law. The sense in which
it must be used in this report, and in connection with the operation of
these companies, describes the process of purchasing accounts receivable
^.S.O. I960, c.71.
2R.S.O. 1960, c.222.
62
Chapter III
at a discount from a vendor to whom they are originally owed to put
cash in his hands and to assume the task and risk of collecting them.
Finally there was Adelaide Acceptance Limited, incorporated as a private
Ontario company on June 30, 1958 under the name of Crest Acceptance
Corporation Limited, and acquired in its entirety on March 8, 1962.
The affairs of this complex of companies were presented to the
shareholders of Atlantic Acceptance and the public at large on a
consolidated basis; that is to say that, after eliminating inter-company
debts, the assets and liabilities of all of them were added up and shown
in the aggregate on the consolidated balance sheet of Atlantic Accept-
ance and its subsidiary companies, the operations for the year being
treated in the same manner. Except for a period of a few months after
incorporation the company's auditors had been Wright, Erickson, Lee
& Macdonald of Hamilton who had offices in the same building at 66
King Street West. They audited the accounts of the parent company,
Atlantic Finance Corporation, and Atlantic Acceptance (Toronto) and
reported on the consolidated financial statements. The other subsidiaries
had different auditors upon whom Wright, Erickson & Co. relied
throughout the period during which they conducted the audit which
concluded with the financial statements at December 31, 1963. There-
after they were succeeded by Deloitte, Plender, Haskins & Sells who per-
formed the same function and who relied, in their turn, on the same
auditors in relation to the same subsidiary companies with the addition
of Pay As You Study Plan and Concourse Agencies.
The Financial Statements
Table l1 is a condensation of the consolidated balance sheets
and income statements of Atlantic Acceptance Corporation Limited
and subsidiary companies prepared from the published annual reports
of the company, beginning with the first annual report with respect
to the situation as at June 30, 1954 and ending with that of
December 31, 1964 which was the last audited statement issued by the
company before receivership. By reading across the page it is possible
to make a quick comparison of the figures appropriate to each
particular year, shown in vertical columns. The two graphic charts,2
which appear overleaf, show the trend of growth in accounts receivable
less the allowance for bad debts taken in each year, secured public
borrowing, subordinated borrowing, secured bank loans and share capital,
and the expansion in the number of branch offices occupied by Atlantic
Acceptance and Atlantic Finance, severally and jointly. Unlike the con-
densed consolidated financial statements the charts include the period
Exhibit 542.
'Exhibits 543-4.
63
ATLANTIC ACCEPTANCE CORPORATION LIMITED
THE GROWTH OF THE COMPANY
FROM INCEPTION TO THE DATE OF RECEIVERSHIP
AMOUNT OF
LOAN PORTFOLIO.
DEBT AND CAPITAL ACCOUNTS
^MILLIONS OF DOLLARS )
(160
1
ACCOUNTS RECEIVABLE /
(NET OF ALLOWANCE FOR BAD DEBTS) /
LEGEND
SECURED BANK LOAN
_ SUBORDINATED BORROWING
— 1 1
■ ' —
'
' 1
/
/
/
/
/ 1 '
/ /
/ 1 '
!
/ '
/ /
/ /
/ /
/
/ /
/ /
/ /
/ /
/ /
/ / SECURED
/ / PUBLIC BORROWING
/ !
1 f
/ /
/ /
/ /'
1
/
/
/
/
/ SUBORDINATED BORROWING
f i
r
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/
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<*£— CAPITAL-
y
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iN
JUN30
1954
JUN30
1955
DEC 31
1956
DEC 31 DEC 31 DEC 31 DEC 31 DEC 31
1957 1958 1959 1960 1961
DATES OF PUBLISHED FINANCIAL REPORTS
DEC 31
196?
DEC 31
1963
DEC 31
1964
ATLANTIC ACCEPTANCE CORPORATION LIMITED
AND ITS WHOLLY OWNED SUBSIDIARY
ATLANTIC FINANCE CORPORATION LIMITED
THE GROWTH OF FINANCE AND ACCEPTANCE BRANCHES
FROM INCEPTION TO THE DATE OF RECEIVERSHIP
NUMBER OF
OFFICE LOCATIONS 70
AND BRANCHES
LEGEND
NUMBER OF BRANCHES OPERATED
TH COMPANIES
NUMBER OF INDIVIDUAL OFFICE
riONS
.(TIC FINANCE OFFICES (ONLY)
gTlC ACCEPTANCE OFFICES (only)
offices -acceptance branches
'inance branches in shared
ISES
t
i
BY BC
TOTAL
LOCA
ATLA
i
i
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tOT»l.MUK»|« /
/
JOINT
AND
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DATES OF PUBLISHED ANNUAL REPORTS
Structure and Growth
from January 1 to June 17, 1965, the date of receivership; the same
broken period, although not included in the condensed financial state-
ments, is illustrated by consolidated financial statements prepared by
Deloitte, Plender, Haskins & Sells for the receiver and manager and sub-
mitted on August 10, 1965. Since these statements were unaudited and
not published by the company, they are not included in the condensed
financial statements previously referred to; moreover they suffer from, or
perhaps benefit from a restatement of the allowances for bad debts
against notes and accounts receivable of two and a half times what was
shown in the statement for 1964 reported on by the same auditors, an
upward revision which would have been vigorously and perhaps success-
fully contested by the former management had it survived the disaster of
default. The balance sheet is appended at Table 23 to complete the
record, and, like the graphs, shows that Atlantic's rate of expansion was
in the order of those stars in the firmament known as "red giants", whose
huge enlargement is the signal for imminent explosion.
Indeed the most striking aspect of these statements and charts is
the transformation of the affairs of the company which occurred in the
year 1959 and to which reference has been made in the previous chapter
as corresponding with C. P. Morgan's assumption of full responsibility
for management, insisted on by Lambert & Co. in the course of 1958.
Beginning with that of June 30, 1954, the end of the company's first
fiscal year, and ending with that for December 31, 1958, they indicate
modest growth, qualified to the extent that the assets for 1957 and 1958
include $1,008,998 and $685,733 respectively as accounts receivable,
the sums due from Pacific Western Airlines arising from Atlantic's
financing of the purchase of the Flying Tiger aircraft without which it
is doubtful that any profit could properly have been shown for the
operations of those years. It will be observed that in the year 1959,
some of the salient events of which have already been touched upon, the
assets of the complex grow by more than three times to $11,189,330,
an increase of something in the order of $4,000,000 or three and a half
times what they were stated to be at the end of 1958. This was the
largest proportionate increase in Atlantic's history, although that of assets
in the succeeding years was spectacular enough. At the end of 1960
they were recorded as $19,843,720, in 1961 $36,305,805, in 1962
$63,272,986, in 1963 $91,873,203 and in 1964 $132,937,729; looking
at the unaudited consolidated balance sheet of June 17, 1965,4
they are shown as having reached $154,809,926 in spite of the in-
creased reservation against bad debts. These assets, from beginning
to end, are overwhelmingly attributable to notes and accounts receivable.
'Exhibit 546.
'Table 2.
66
Chapter III
Until the publication of the statement for 1963 it had not been the
practice to indicate in these statements the specific amounts deducted
from the accounts receivable by way of allowance for bad debts, only
the net figure being shown. In that year the amounts were given in
respect of 1963 and the preceding year for comparative purposes, so that
the shareholder might observe that in 1962, in respect of receivables of
$60,815,509, $1,228,733 was reserved and in 1963, for receivables of
$88,227,839, the allowance was $1,747,176. These figures are taken
from the statements themselves5 and are not shown on the condensed
statements.
Atlantic Acceptance showed a profit for each year of its operations
according to the condensed consolidated income statements opposite the
entry "net income earned", beginning with the year ended June 30, 1954
in the amount of $14,700 and concluding at December 31, 1964 in the
amount of $1,100,004. The corresponding statement for the period
ending July 17, 1965 not unnaturally shows a pronounced loss of
$2,813,660, but it would be unreasonable to suggest that this had been
prepared on a basis consistent with that of the preceding year. It has
already been noted that Atlantic had consistently paid a dividend of
$1.10 per share on its first preference shares from 1954 to 1959 and
it continued to do so to the end. In 1960 a quarterly dividend was first
paid on the common stock in the amount of 10^ per share and this was
gradually increased to 80^ per share per annum, until in April of 1965
the extraordinary decision was taken to pay a quarterly dividend of 25£.
The other preference shares were treated for dividend purposes like
common shares and comprised the following: 15,000 first preference
shares with a par value of $20, each redeemable at $22 and convertible
into one common share each, of which 14,515 were issued and fully
paid, the remainder having been converted; 200,000 second preference
shares with a par value of $24 each and a maximum dividend rate of
7% per annum, redeemable at a price not to exceed 112% of the
amount paid up, divided into 190,000 series A and 10,000 series B 6%
cumulative shares, convertible into 1.153 common shares per second
preference share and redeemable at varying percentages above par, all
issued and fully paid; 60,000 third preference shares without par value,
participating and convertible into one common share each of which
10,000 had been issued and paid for; 1,015,000 common shares without
nominal or par value of which 699,7 1 8 were outstanding; all with an
ascribed value of $14,455,087. On this capital stock which was identical
in authorization and issue, with minor variations of distribution, with
that outstanding at December 31, 1964, dividends in the sum of
$727,741 had been paid at 80£. The receiver and manager's balance
'Exhibits 44-5.
67
Structure and Growth
sheet includes dividends payable in the amount of $249,430, and another
liability of $5,010,000 in respect of the note on which default was
made. The resulting deficit was $4,358,268.
Two Changes in Accounting Practice: Branch Offices and Income Tax
The consistency of the accounting principles applied by the
company to its financial statements year by year was subject to two
modifications which should be noted. The first involved the treatment
of branch development costs and may conveniently be looked at in
connection with the expansion of the number of branch offices of Atlantic
Acceptance and Atlantic Finance. This is illustrated on the chart at
page 65 showing growth during each annual period and the final
five and a half months ending on June 17, 1965, the increase in
the total number of branches operated by both of these companies,
broken down into the total number of individual office locations, which
are again subdivided into the offices in which Atlantic Finance and
Atlantic Acceptance operated alone, and the number of offices in which
both companies shared premises. By the end of 1958, including the
office of Talbotr-At^€ptam?e Companyfnhere were five branch offices all
in Ontario, at Hamilton (where the head office was also located),
Ottawa, St. Catharines, St. Thomas and Kingston, and until 1961 it was
the practice for Atlantic Finance to share premises with the parent
company. In that year, without abandoning the joint offices, the company
began to open Atlantic Finance offices in separate premises and the
upward curve of this development keeps pace with that showing the total
number of individual office locations. It was indeed in that year that the
profitability and stable character of the small loans business was fully
realized by C. P. Morgan. It can be seen at a glance that the period
of most rapid expansion of the individual and consequently most
expensive office locations took place in 1965 in the last months of
Atlantic's solvency, at least in terms of acceleration, although the year
1963 produced more new locations than any other calendar period of
the same length. In the short 1965 period it appears that 31 new
branches were opened in separate premises in addition to the 31
Atlantic Acceptance branches and 71 Atlantic Finance branches shown
as being in operation at the end of 1964,1 and the records indicate
that they were virtually all those of Atlantic Finance. The
proliferation is remarkable in that it occurred at a time when every
indicator pointed to the desirability of restricting Atlantic's lending
because of foreseeable difficulty in the borrowing of funds.
It is a trite principle of business practice that the opening of branch
offices at new locations presents the hazard of unprofitable operation
M \hibit 45.
£ Tat loot fmance^ Co^fKuy
68
Chapter III
over a period of two to three years when expenses are high in proportion
to revenue, and there are accounting procedures designed to allocate this
expense more realistically than by charging it against the operations of
the year in which a branch is opened. Until 1961 Atlantic had followed
the latter conservative practice but in the financial statements of that
year, as the number and cost of opening new branches rapidly increased,
provision was made, as may be seen from the condensed balance sheets,
for showing deferred branch development costs as an asset after deduc-
tion of current revenue. A note to that financial statement which
disclosed the adoption of the new practice indicates deferment over a
three-year period of a portion of the development cost as chargeable to
the operations of these later years, and constitutes a well-recognized
accounting expedient, remarkable only in that it increased as an asset
from $87,032 in 1961 to $450,158 at the end of 1964 and that the net
income earned in 1961 of $356,352 would have been reduced by
$41,775 had this provision not been made.
A more controversial adjustment to the consolidated accounts was
made in 1963 and is reflected in the following note to the balance sheet
of that year:2
"In 1963 the companies adopted the practice of reflecting in their
statements of income only the income taxes payable for the year. If the
prior years' practice had been followed in 1963, net income would
have been reduced by $246,257 with an amount of $319,870 appearing
on the balance sheet as 'accumulated income tax reductions applicable
to future years'."
In their report, Wright, Erickson, Lee & Co. qualified by referring
to this their opinion as to the accounts being prepared on a basis
consistent with that of the preceding year, and some explanation of
the change and its consequences is here necessary. Atlantic had in its
earlier years decided on a schedule of depreciation for the equipment
which it was entitled to depreciate, for the purpose of calculating its
operating results for any given year, at a rate which was, as is often the
case, lower than the rate permitted by the Department of National
Revenue for income tax purposes. As a result it was able to show a
higher profit than would have been recorded had it provided in its books
for the largest amount allowable; yet, in order to lessen the incidence of
tax, the company claimed for income tax purposes, if not in every case
the maximum rate of depreciation, a substantially higher rate than had
been provided for in the accounts. Since depreciation is exhaustible and
since the exhaustion point for taxation will be reached on this basis
earlier than for accounting purposes, it is the normal and prudent
practice for accountants to provide for that period when there would be
'Exhibit 44.
69
Structure and Growth
less or no depreciation allowed by the taxing authorities in respect of
assets which were still being depreciated as a matter of internal book-
keeping by setting up a figure on the liability side of the balance sheet,
in this case referred to as "accumulated income tax reductions applicable
to future years". This figure in 1962 had been a mere $73,614, but in
1963 it was of such proportions that the company deliberately took the
risk of taking this provision for future taxes payable into surplus, or
"retained earnings" as it is sometimes expressively described. Such a
step has the advantage of increasing the figure which may be shown as
profit at once, or in the near future, but inevitably exposes him who
takes it to the possibility of compensating reductions in later years when
more of his income is liable to tax and nothing has been set aside to
meet it. If, however, an increase in his assets were of a sufficiently high
order, as might be the case in what Mr. Orr described as a "crescendo"
company, the curve of depreciation allowable for tax purposes might
be arrested in its downward course so that it would never cross the curve
of depreciation selected for internal accounting purposes. In fact Atlantic
was justified by the harsh events of June, 1965 in abandoning what
would otherwise have been a prudent course, but justified only in a way
which could not be foreseen and would never have been acknowledged.
Davidson has testified to Morgan's exasperation with his auditors for
qualifying their report in relation to this change, but Lee, when
he gave evidence before the Commission,3 could not recall any protest
by Morgan on a point which in any event he would not have considered
debatable. Davidson considered this action by Wright, Erickson, Lee
& Co. the reason for Morgan agreeing to the firm's replacement by
Deloitte, Plender, Haskins & Sells at that time, a course which had
been urged upon him by Christie and Rooney since 1961.
Loan and Investment Position at June 17, 1965
1. Atlantic Acceptance Corporation Limited
Turning now to the sources and distribution of the accounts
receivable of Atlantic Acceptance as at June 17, 1965, the next chart
to be examined is Table 31 illustrating the company's loan and
investment position at the date of receivership. The chart shows
in schematic form, based upon figures available to Deloitte, Plender,
Haskins & Sells and used to prepare their unaudited statement
for the receiver and manager in August of 1965, the amounts receivable
by way of loans made by the parent company direct to the public, and
to its wholly-owned subsidiary companies and by them to the public,
broken down into accounts receivable, unearned interest and amounts
'Evidence Volume 79.
'Exhibit 547.
70
Chapter III
due to dealers, and the net amounts loaned after deducting interest
and dealer reserves from the gross receivables.
The figures shown are rounded to thousands to save space; thus
the two entries at the bottom of the chart, the allowance for bad debts
and the net book value of consolidated accounts receivable, would reflect
the position of those interim unaudited statements which, as has been
seen, added some $4,000,000 to the allowance for bad debts shown on
the audited statement for 1964. It will be seen that Atlantic had two
ways of lending its money, either directly to the public by discounting
the notes and conditional sales contracts given to retailers and by making
what are known as wholesale and industrial loans (an industrial division
having been set up early in 1959), or by advancing sums to its sub-
sidiaries which in turn lent them to the public in the same manner,
subject to the variation in procedure inherent in the factoring process
applied by Commodore Sales Acceptance Limited and Commodore
Factors Limited and to that portion of the business of Atlantic Finance
Corporation devoted to small loans to individual borrowers. The chart
shows three columns consisting of accounts receivable, unearned interest
and amounts due to dealers, and net amounts loaned; the accounts
receivable show the aggregate amount of the notes payable including
interest to the date of maturity; the unearned interest and amounts due
to dealers include that proportion of the pre-computed interest deferred
to future periods, together with what has been described as dealer
reserves or hold-backs, according to the nature of the contract, payable
to dealers who have produced the business if the notes in question are
paid according to their tenor; thus the net amounts loaned shown in the
right hand column represent the amounts payable which Atlantic and its
subsidiaries would have received if all their debtors had paid them on
July 17, 1965. Atlantic Acceptance Corporation was owed on this
basis $55,455,000 by debtors other than its own subsidiary companies
who owed it $86,046,000, not including the cost of the parent com-
pany's investment in those subsidiaries which is shown as $1,984,000.
The subsidiaries in turn were owed by borrowers, in respect of net
amounts loaned, a total of $91,162,000, an apparently favourable balance
and not characteristic of the position in each subsidiary company illus-
trated.
The position of Atlantic Acceptance Corporation, as distinct from
other component corporate parts of the Atlantic complex, can be shortly
stated. It was the parent of all the other companies except Commodore
Factors Limited of which it was the grandparent. It borrowed, with
minor exceptions, all the money which was lent either directly to the
public or to the subsidiary companies, in the order of 40% and 60%
respectively of the whole, and in respect of that 40% loaned directly
to the public it conducted a largely conventional finance business of the
71
Structure and Growth
type which is known as acceptance business, discounting paper given to
retailers by purchasers of goods of which approximately one half were
motor vehicles. As to the balance of its lending to the subsidiary com-
panies, it is necessary to examine Table 3 in conjunction with other
charts and tables.
2. Atlantic Finance Corporation Limited
The next chart is Table 42 and shows the loan and invest-
ment position of Atlantic Finance Corporation which had borrowed
$32,407,000 from Atlantic Acceptance and had in turn lent $33,-
639,000 to the public in the form of personal loans. The financial
statement of 1958,3 because it shows comparative figures for 1957
which was the first full year of operation, certified by Wright,
Erickson, Lee & Co., can conveniently be compared with Deloitte,
Plender, Haskins & Sells' audited statement for 1964 and unaudited
statement for June 17, 1965 to illustrate the growth of this com-
pany.4 At the end of 1957 total assets were approximately $142,-
300, in 1958 $266,700, and by 1963 they had risen to $14,500,-
000, doubling in the course of the next year to $29,151,000, the
overwhelming preponderance being in notes and accounts receivable.
The figures for these as at the end of 1964, and as at the date of
receivership, take another leap upward from $29,000,000 to $35,000,-
000, all almost entirely financed by loans from the parent company,
an increase in the order of 25%. Among these receivables there were
some 37,000 separate accounts relating to small loans, and the balance
consisted of larger personal loans or loans of the acceptance type.
3. The Premier Finance Corporation Limited
The second subsidiary shown on Table 3 is the Premier Finance
Corporation Limited, the loan and investment position of which is illus-
trated by Table 5.5 Whereas Atlantic Finance Corporation had lent
more to the public than it had received by way of loans from Atlantic
Acceptance, here the position is reversed as at June 17, 1965. The
explanation is generally that Premier Finance had ceased to lend in
the field of soft goods, or indeed in any conventional acceptance
field, in an active way during 1964, and had concentrated on the
collection of its accounts receivable, with one exception involving
loans to a company known as Racan Photo-Copy Corporation Limited;
it had disposed of $741,000 of these receivables to its sister company
Standard Discount Corporation Limited. The price paid to O'Neill in
"Exhibit 548.
"Exhibit 549.
♦Exhibits 550-1.
'Exhibit 552.
72
Chapter III
1959 was $525,000 and, as well as being engaged as manager of the
company thereafter, he was permitted to conduct out of Premier's office
in Toronto his own operation known as O'Neill Finance Company.
Premier's accounts were throughout audited by E. M. Sprackman & Co.
or E. M. Sprackman, Siderson & Co., on whom the head auditors relied
in reporting on the consolidated statements of Atlantic Acceptance, and
the pro forma financial statement annexed to the purchase agreement
between O'Neill and Atlantic Acceptance0 showed total assets of
$1,113,000 of which approximately $1,000,000 was attributable to
"budget accounts receivable" not verified by the auditors. Financial
statements for the years 1959, 1963 and 1964 all certified by the
Sprackman firm, and one for the period ending June 17, 1965
signed by Deloitte, Plender, Haskins & Sells,7 show that by 1963
the total assets had risen to $8,550,000, had declined to $4,700,000
in 1964 and as at the date of receivership were stated as $696,394
after a massive allowance for bad debts of $1,696,042. After
acquisition the type of business conducted by Premier Finance had
changed from the exclusive financing of soft goods to include that of
charge accounts at stores, and in no particular more markedly than in its
loans to the Racan Company. Premier Finance shares with Commodore
Sales Acceptance the distinction, if such it is, of providing year after
year, and in the face of the plainest evidence of financial irresponsibility
and technical incompetence, a war chest to Racan Photo-Copy Corpora-
tion for the speculative operations of Elias Yassin Rabbiah. It is suffi-
cient to notice here that the records of Premier Finance show an open-
ing advance in December, 1961 of somewhat over $150,000 and a
steadily rising debit balance against Racan, fortified by the accrual of
interest, until it reached a high point at the end of 1964 of $840,273,
declining thereafter to $788,500 at the date of receivership. The position
then as represented on Table 5 shows loans by the parent company to
Premier Finance amounting to nearly $3,000,000 and amounts receiv-
able by the latter made up of the $741,000 due from Standard Discount
Corporation, the balance being divided between the amount due from
Racan and sales finance accounts receivable in the order of $1,500,000
of which only some $700,000 was considered recoverable, and certainly
not the portion due from Racan.
4. Standard Discount Corporation Limited
The loan and investment position of Standard Discount Corpora-
tion Limited at the date of receivership is illustrated by Table 6.s
This company's source of funds was the parent company to the
"Exhibit 553.
'Exhibits 554-7.
•Exhibit 559.
73
Structure and Growth
extent of $2,264,000 and Premier Finance, by the transfer above
referred to, in the amount of $741,000. The net amount loaned to the
public by way of sales finance accounts was $3,864,000. The company,
acquired by Atlantic in October 1961 had, according to its financial
statement for the six months ending December 31, 1961, audited by
Stone, Conway, Anger & Stone,9 total assets of some $1,590,000 with
accounts receivable of $1,440,000. By the end of 196410 its total
assets, also largely accounts receivable, had risen to $3,237,000 and
the interim balance sheet as at June 17, 1965, reported on by the Stone,
Conway firm without expression of opinion, shows assets of approxi-
mately $4,000,000. Its operations appear to have been profitable
throughout and its growth on a modest scale, its business being with
dealers in soft goods in the Toronto area and consisting of a large
number of small accounts.
5. Atlantic Acceptance (Toronto) Limited
Atlantic Acceptance (Toronto) Limited, as already indicated, was
incorporated to hold mortgages of real estate and to provide that service
for other members of the complex not authorized to do so by their
letters patent. Its simple loan and investment position as at June 17,
1965 appears on Table 7.11 At this point Atlantic had advanced to it
$293,000 and it in turn had advanced $302,000 by way of loans
secured by mortgages. Its auditors were Wright, Erickson, Lee & Co.
and Deloitte, Plender & Co. and the financial statements for the periods
ending December 31, I960,12 to December 31, 1964,13 together with the
unaudited statement for June 17, 1965,14 indicate that after incorpora-
tion it took over from other companies in the Atlantic group receivables
in the amount of approximately $100,000, rising to $290,800 and
showing a small annual profit or loss on operations during the period of
its active life.
6. Pay As You Study Plan Limited, and
7. Concourse Agencies Limited
Pay As You Study Plan and Concourse Agencies Limited had
their accounts audited by the firm of Walton, Wagman & Co., of which
a great deal will be heard hereafter, up to and including the audit for
1963 when this responsibility was taken over by Deloitte, Plender,
"Exhibit 560.
"Exhibit 561.
"Exhibit 563.
"Exhibit 564.
"Exhibit 565.
"Exhibit 566.
74
Chapter HI
Haskins & Sells with the audit of the parent company and those sub-
sidiaries formerly entrusted to Wright, Erickson, Lee & Co. They thus
constituted the only subsidiaries of the consolidation which were added
to the engagement of the head auditors at that time, and indeed added
very little. The loan and investment chart of Pay As You Study
Plan, Table 8,15 shows as at June 17, 1965 $30,000 payable to
Atlantic Acceptance by this company and $3,000 receivable by it
from borrowers, and the financial statements indicate a decline in these
receivables from $34,000 at the end of 1962 to a net figure of $500,
after allowance for bad debts of $2,500 at the date of receivership and
a deficit of $28,000. Its operations were never more than modest and
never profitable. Concourse Agencies Limited, formerly Humbertown
Services Limited, changed its type of operation from that of financing
purchases made with credit cards at the time when it changed its name
in 1960 to that of a collection agency for other companies in the
Atlantic group. Its loan and investment chart at Table 916 shows a
rounded figure of $1,000 advanced by the parent company (actually
$772) with issued capital of $3 and a deficit of $775.
Loan and Investment Position and Financial
Statements of Adelaide Street Subsidiaries
There now fall to be considered, as the remaining companies in
the Atlantic group, the loan and investment positions of Commodore
Sales Acceptance Limited, Commodore Factors Limited and Adelaide
Acceptance Limited on a basis consistent with what has gone before,
but also, because of their peculiar importance at all points to any study
of the rise and fall of Atlantic Acceptance, in somewhat more detail.
It will be recalled that these companies conducted their operations in
the executive offices of Atlantic in Toronto under the eye and hand of
C. P. Morgan. It will also be recalled that it was in relation to the files
of Commodore Sales Acceptance that Morgan lost his composure,
usually under precise control, when he first revealed to Medland and
Sheeline the extent and quality of the loans made by this company in
the week after Atlantic's default. In addition to their habitation, the
three companies had one other salient characteristic in common; their
accounts were audited, and their financial statements reported on by
Walton, Wagman & Co. of which the partners were William Louis
Walton, C.A., a licensed trustee in bankruptcy, and Harry Wagman,
C.A. This firm was known as Wagman, Fruitman & Lando after Wal-
ton's trial and conviction for income tax fraud in 1964. an event which
"Exhibit 567.
"Exhibit 571.
75
Structure and Growth
was foreshadowed in the later months of 1963. Of the three companies,
Commodore Sales Acceptance was of the greatest consequence and
should be examined first.
1. Commodore Sales Acceptance Limited
The creation of Commodore Sales Acceptance by C. P. Morgan as
a vehicle for factoring the accounts receivable of Commodore Portable
Typewriter Limited, to become by change of name Commodore Busi-
ness Machines (Canada) Limited and its acquisition by Atlantic
Acceptance in two stages, first in 1959 as to 51% of its common shares,
then by an elaborate if not complicated process as to the remaining
49% in 1961 is a story in itself and must be reserved for a later section
of this report. An exhaustive examination of its accounts receivable
into which so much Atlantic Acceptance money flowed and evaporated,
and the accounting methods by which this company was presented to
its directors, all of whom were directors of Atlantic, as a healthy and
profitable subsidiary, was made by the Commission's accountants and
will also be referred to again. The loan and investment position at
the date of receivership is shown on Table 101 and is more com-
plex than its predecessors. The company's business, which was factoring
accounts receivable and the making of large loans of the industrial
type, was sustained, with the exception of bank advances of some
$600,000, entirely by the funds of the parent company to which it
owed $34,155,000. It had advanced to the borrowers shown on Table
10 funds of which the net amount loaned was $35,896,000.
A more detailed record of this company's loans is appended
under the heading "Commodore Sales Acceptance Limited — History of
Accounts Receivable from Inception in 1959 to June 17, 1965" as
Table ll.2 These figures, which show the position at the end of
each year of the company's history up to and including the date of
receivership, are expressed in net amounts receivable after deducting
holdbacks to dealers and unearned interest deferred to subsequent
years. They do not, of course, reveal amounts which may have been
borrowed and repaid within the confines of any one calendar year or
the broken period of 1965. The loan and investment chart has certain
peculiarities, not encountered in the preceding charts, in that individual
borrowers are distinguished by large circles compared with the squares
indicating corporate borrowers; three squares, assigned first to the "Little
Scot Stores" consisting of ten companies, second to Bond & Cosman
Limited, Trans Canada Millinery Limited and Mart Utilities Limited,
and third to Chatsworth Enterprises Limited and Kelton Ultrasonics
Exhibit 573.
Exhibit 578.
76
Chapter III
Limited, are all surrounded by a dotted line, the enclosure representing
"Groship Companies", viz. companies created and managed by one
Gerald Groship. The Little Scot group of ten companies comprise
Celtic Discount Stores Limited, Golburn Discount Sales Limited,
Jumbo Discount Sales Limited, Preston Lake Discount Stores Limited,
Province-Wide Stores Limited, Saxon Discount Stores Limited, Anglo
Discount Sales Limited, Spadina Discount Stores Limited, Highlight
Distributors Limited and Mart Buying Services Limited. Then there
is a block of "other accounts receivable" (under $10,000) for which
some $51,000 was outstanding. Two notes appear at the bottom of this
chart, one in respect of A. J. & E. Goldberg Bros. Limited from which
$490,000 was receivable, indicating that Commodore Sales Acceptance
apparently owned the company at the time of receivership, and another
in respect of a loan of $62,000 to W. C. Dymond which was secured by
a mortgage of land already foreclosed. Turning to Table 11, the histor-
ical progression of the accounts receivable, certain salient and significant
figures can be noticed in the right-hand column of the schedule dealing
with the position at June 17, 1965, showing that Aurora Leasing Cor-
poration owed Commodore Sales Acceptance roughly $10,009,000,
Dalite Corporation (Canada) Limited $4,700,000, D.H.I. Limited $4,-
503,000, the Groship group of companies $3,149,000, Cimcony of
Canada Limited $1,945,000, Pro Musica Limited $1,213,000 and, in a
special category of its own, as will be seen, Hugo Oppenheim und Sohn
Nachfolger Berlin Privatbank $3,821,000, amounting to more than half
the total accounts receivable shown of roughly $35,900,000. Smaller,
but none the less considerable advances outstanding at the date of
receivership had been made to American-Marsh Pumps (Canada) Limi-
ted for approximately $687,000, General Lawn Spray Limited $689,000,
Trans Commercial Acceptance Limited $923,000, Masco Construction
Company Limited $817,000, American Automation Limited $454,000,
Furniture Sales Limited $375,000, Racan Photo-Copy Corporation
Limited $461,000 and Valley Farm and Enterprises Limited $118,000,
which last represented a progressive decline from an amount of $157,500
first recorded at the year-end December 31, 1961. A loan to L.B.H.
Management Limited of approximately $548,000 first appears in the
column devoted to the first half of 1965. The amount receivable from
Commodore Business Machines (Canada) Limited, being the largest
single account at the end of 1959, in the amount of $320,574, increases
at the end of 1960 to $675,856 at the end of 1961 to $954,553,
declines markedly by the end of 1962 to $333,563, rises again to
$444,334, thereafter decreasing at the end of 1964 to $359,170 and
as at the date of receivership is $302,265. All of these loans and many
others require further examination in the proper place.
77
Structure and Growth
The condensed comparative balance sheets and income state-
ments for Commodore Sales Acceptance are shown on Table 12.3
It displays in columnar form the main features of the annual financial
statements of the company for the years 1959 to 1964 inclusive
and that portion of the year 1965 to the date of the receiving order, and
the figures are taken from these statements without verification by the
Commission's accountants. The assets grew rapidly from $888,000 at
the end of 1959 to $36,531,000 at June 17, 1965, doubling or more
than doubling annually until the end of 1963, in which year there was
a comparatively modest increase over the figure recorded at the end of
1962 of some 25%, but reaching in the year 1964 an aggregate figure
of $31,028,099. Another $6,000,000 in accounts receivable was added
in the first half of 1965. The liabilities side of the balance sheet shows,
in respect of demand notes payable, debentures and shareholders' equity,
that all of the company's funds after the spring of 1961 were supplied
by Atlantic with the exception of loans extended by the Bank of Nova
Scotia. Two exceptions to this one-way flow may be noted; an asset
shown as "notes receivable — Atlantic Acceptance", balanced by a bank
loan liability, in the amount of $1,077,500 in 1962, and an asset of
$750,000 at June 17, 1965, balanced by the same liability recorded as
at December 31, 1964, the latter contributing to Atlantic's bank lines
by being borrowed by Commodore Sales Acceptance and lent to
Atlantic, secured by a 6% note.
The income statement shows a remarkable increase in interest
earned and profitability from year to year, except in 1962 when the
gross earnings increased proportionately less and financial advisory fees
of $134,667 were higher than in any other year. A small profit in that
year of $2,035 was apparently adjusted in 1963 by reducing the finan-
cial advisory fees and maintaining the provision for doubtful accounts
at virtually the same figure provided the year before, in the face of
earned and profitability from year to year, except in 1962 when the
2. Commodore Factors Limited
Commodore Sales Acceptance had, as a wholly-owned subsidiary
company, Commodore Factors Limited, which was incorporated in the
State of New York some three months before Atlantic Acceptance
bought out the minority interest in its parent company in May, 1961.
Its function was to provide the same service for customers in the United
States as Commodore Sales Acceptance provided in Canada. The
chart of its loan and investment position, Table 13,4 shows total
ownership by Commodore Sales Acceptance, but the flow of funds
•Exhibit 577.
'Exhibit 579.
78
Chapter III
comes directly from the grandparent Atlantic Acceptance amounting to
$9,195,000 U.S. at the date of receivership, and the sum of $443,000
U.S. is receivable from Commodore Factors Limited by Commodore
Business Machines (Canada) Limited which in turn, as remarked
before, owed Commodore Sales Acceptance $302,000 in Canadian
funds. The accounts receivable are far fewer than in the case of Com-
modore Sales Acceptance, as may be seen in the "history of accounts
receivable" at Table 14,5 being only half-a-dozen in number at the end
of 1961, and only twelve of any significance at the date of receivership,
but at this later date they amounted to over $10,000,000 in Canadian
funds. As will be seen hereafter this creditor position of Commodore
Business Machines is directly linked to the appearance of Baronet
Associates Inc. as a debtor for over $1,000,000 in 1964 and 1965,
as is also its declining indebtedness to Commodore Sales Acceptance
and the ascending loans to Trans Commercial Acceptance Limited
shown on Table 12. General Spray Service* Inc., Sprayfoil Cor-
poration Inc. and Turf Kings Inc. are associated companies and
together account for more than $2,000,000; Manhattan Sound and
Manhattan West Sound Corporations have loans in the order of
nearly $1,000,000 U.S., and these two companies must be grouped
with Motion Picture Security Corporation with a loan outstanding of
roughly $2,819,000 U.S. at the date of receivership. A similar connec-
tion exists between Jacroy Canada Limited and Symphony Paint
Company which accounts for over $1,500,000, and again between Nevil
Enterprises Inc., Nevil Plastics Inc. and Tools and Molds Inc., the
vehicles of one Neville Levinson of Buffalo, N.Y. and Toronto, which
among them account for almost $1,500,000 of the receivables in the
final stage. Commodore Factors therefore made large factoring and
industrial loans primarily to a small number of associated companies,
all in United States funds, during its short life of a little over four years.
Its condensed comparative balance sheets and income statements at
Table 15,6 which are, with the exception of the figures for 1965,
expressed in Canadian funds, have most features in common with
those of Commodore Sales Acceptance, showing its funds almost entirely
advanced by Atlantic, secured by demand notes on which interest does
not seem to have been paid after 1962, with assets almost entirely made
up of accounts receivable rising steadily in recorded value from one and
a half to seven and a half millions between 1961 and 1964 in Canadian
funds, and then very sharply rising to $10,127,000 in the first half of
1965, an increase to which all accounts contribute, but particularly that
of Motion Picture Security Corporation which acted as a conduit for a
"Exhibit 581.
•Exhibit 580.
79
Structure and Growth
loan of Atlantic Acceptance funds through Aurora Leasing Corporation
to Lambert & Co. A comparison of the figures attributed to net income
earned by Commodore Sales Acceptance and Commodore Factors sug-
gests that the latter was allowed to be apparently more profitable than
its parent company, the interest earned being much greater than that
payable, and a modest $15,000 for financial advisory fees exigible only
in 1962. The dealers' interest shown as receivable at the end of 1961,
1962 and 1963 on Exhibit 581 is an oddity which appears to be accrual
of interest not allocated to individual loans, the practice of accumulating
which ceased in 1964.
3. Adelaide Acceptance Limited
Turning to the third and last of the companies subsidiary to
Atlantic Acceptance which were operated from the executive offices
at 100 Adelaide Street West, the loan and investment chart for
Adelaide Acceptance Limited is found at Table 16.7 It will be
recalled that this company was originally named Crest Acceptance
Corporation Limited and incorporated as a private company in Ontario
in 1958. It became wholly-owned by Atlantic in March of 1962 and
its name changed in the following month. As at June 17, 1965, its
liability to Atlantic was $4,056,000 in round figures and the net
amounts loaned by it in respect of twenty-five accounts receivable
was $4,390,000, as set out in detail on Table 178 which shows
the position from year to year between the dates March 31, 1962 and
June 17, 1965. The principal loan, and that of longest duration, was
made to Aurora Leasing Corporation first of all in March 1962, the
month of Adelaide's acquisition by Atlantic, in the amount of $654,000,
which by the end of the year had risen to more than $1,200,000 and by
the end of 1963 to $2,467,000, thereafter declining to $2,145,000, its
position at June 17, 1965. Adelaide Acceptance also started its career
in the Atlantic group with an advance to Commodore Sales Acceptance,
its fellow-subsidiary, of $480,000 no longer outstanding by the end of
1964. Nevil Enterprises Inc. and Nevil Plastics Limited appear as
borrowers beginning in 1962, with amounts of $164,277 and $391,487
respectively outstanding at the time of receivership. Two other large
loans require notice; the first to Frederick's Department Store Limited
shown at the end of 1962 as outstanding in the amount of $604,500
and finally in June 1965 at $634,000; the second to Valley Farm and
Enterprises Limited, fluctuating slightly between $253,700 at the end of
1962 and $254,500 in June 1965. The position of Dalite Corporation
(Canada) Limited developed from a credit balance at the end of 1962
'Exhibit 582.
'Exhibit 584.
80
Chapter III
of $66,000 to a debit balance of almost $160,000 at the end of 1964,
declining to $125,800 owing at the time of receivership. D. W. Reid,
in trust, appears as the recipient of $300,000 in connection with a trans-
action described in Chapter VII.
The condensed comparative balance sheets and income state-
ments for Adelaide Acceptance, Table 18,9 reflect the fact that
the company was purchased with a view to carrying over an income
tax loss of more than $150,000 and show, under the column for opera-
tions in 1962, that it had a profit of $153,603 with no provision for
income tax, its income having been bolstered by a management fee
received of $110,000. In the same year it paid a management fee to
Atlantic Acceptance of $45,442 and in the following year, in which its
earnings attracted tax, this fee was increased to $150,000 reducing the
net income earned to $34,000. No other management fees are recorded
as received or paid and the profit after taxes in 1964 was a mere
$11,361. Other than cash all the assets were receivables and the source
of funds was entirely Atlantic Acceptance, there being no bank loans
recorded in any event at the year-ends. The company apparently made
loans large and small to a number of companies and individuals without
the intervention of dealers, on various types of security, or none at all.
These three subsidiary companies, Commodore Sales Acceptance,
Commodore Factors and Adelaide Acceptance, had certain features in
common other than ownership by Atlantic Acceptance and dependence
upon it for the money which they lent. Commodore Sales Acceptance,
after being incorporated by a solicitor by the name of Louis W. Spencer,
had C. P. Morgan as a director from March 6, 1959 to June 18, 1965.
Alan T. Christie joined the board on August 24, 1960 and resigned on
June 24, 1965. A. C. Rooney joined the same day and resigned on the
day on which he left the board of Atlantic Acceptance, June 30, 1964.
W. P. Gregory was also elected on August 24, 1960 and resigned on
June 24, 1965. After the acquisition of the minority interest in this
company by Atlantic Acceptance, J. A. Medland, W. H. Wallace and
W. H. Martin, the remaining directors of Atlantic, became directors of
Commodore Sales, and Paul C. Sheeline succeeded Rooney on June 30,
1964. Commodore Factors Limited was incorporated through the
agency of a New York City lawyer by the name of Benjamin H. Orem-
land and had a board of three, composed of Morgan, Christie and
Rooney, the last succeeded by David Davidson. Adelaide Acceptance
had the same board, subject to the same replacement, from the date of
acquisition by Atlantic until the end. In the persons of Christie, Rooney,
Wallace and Sheeline, the Lambert interests were solidly, and in the case
of Commodore Factors and Adelaide Acceptance decisively represented.
The three companies had the same auditors, either Walton, Wagman &
•Exhibit 583.
81
Structure and Growth
Co. or the successor firm Wagman, Fruitman & Lando, and Harry
Wagman, personally and through a company owned by Morgan, Walton
and Wagman, Chartered Management Consultants (of Canada) Lim-
ited, played a leading part under Morgan's direction in their manage-
ment. The three companies had the same solicitors, a Toronto firm
known variously as Solomon & Samuel, Solomon, Samuel & Singer,
Solomon & Singer, and Solomon, Singer & Rosen, the principals of which
were Carl M. Solomon throughout, David M. Samuel, who after leaving
the firm continued to act on occasion, and Irwin Singer. Oremland was
a director of and counsel for Exquisite Form Industries Inc. the parent
company of Exquisite Form Brassiere (Canada) Limited of which
H. L. Solomon, Carl M. Solomon's brother, is president, and will appear
again, as will Carl M. Solomon and his partners, in transactions which
it is reasonable to assume Messrs. Sullivan & Cromwell and Osier,
Hoskin & Harcourt knew nothing about.
The nature of the business carried on by Atlantic Acceptance and
its subsidiaries is illustrated by the following table reproduced from the
receiver and manager's "Memorandum as to Initial Award of Compen-
sation", dated November 17, 1966 and prepared for submission to the
Supreme Court of Ontario.10 It must be borne in mind that the right-
hand column, "notes receivable", represents the net amount after deduc-
tion of unearned interest and the estimated allowance for possible loss
as at June 17, 1965:
Company
Atlantic Acceptance Corporation Limited
Atlantic Finance Corporation Limited
Commodore Sales Acceptance Limited
Commodore Factors Limited
Adelaide Acceptance Limited
Standard Discount Corporation Limited
The Premier Finance Corporation Limited
Atlantic Acceptance (Toronto) Limited \
Pay As You Study Plan Limited V 108 290,364
Concourse Agencies Limited J
No. of
Notes
Accounts
Receivable
34,184
$ 53,282,257
54,477
33,167,133
63
35,560,344
17
10,707,401
16
4,295,612
70,714
3,683,083
6,997
666,849
166,576 $141,653,043
Two things are immediately apparent; first that well over a third
of the notes, something in the order of $50,000,000, were receivable by
Commodore Sales Acceptance, Commodore Factors and Adelaide
Acceptance; the second is the remarkably small number of accounts in
"Appendix F, (Exhibit 4715).
82
Chapter III
which these notes were held compared to those of the other active
companies. The comparison is somewhat distorted in that the factoring
process itself may involve the administration of a large number of
accounts receivable bought or pledged, but nevertheless it is very
striking.
Loan, Lease and Investment Position and
Financial Statements of Aurora Leasing Corporation
It is necessary to refer at this stage, on a comparable basis, to
Aurora Leasing Corporation Limited, which, although not a subsidiary
company of Atlantic Acceptance, was indeed a satellite, and, as will
appear, was under the effective control of C. P. Morgan and managed
by members of his inner circle. It was incorporated as a public
Dominion company in 1956 to carry on the business of leasing equip-
ment, but from October, 1960 its operations were conducted from the
office of Walton, Wagman & Co. The methods used to bring it into
Atlantic orbit will be examined in the next chapter but, as documents
already referred to have indicated, it had by June 17, 1965 been
advanced upwards of $12,000,000 by Commodore Sales Acceptance
and Adelaide Acceptance from funds supplied by their parent company.
A chart illustrating the loan and investment position — described
thereon as "loan, lease and investment position" — is Table 19.1 It
is so described because the company's original business was that of
leasing equipment owned by it, secured by rental agreements over a
period of months or years, and it only got by degrees into the business
of making industrial loans of the type made by Atlantic and the Adelaide
Street group to the point where this activity easily predominated. The
chart shows sources of funds advanced to Aurora Leasing coming from
Commodore Sales Acceptance to the extent of some $10,000,000 and
from Adelaide Acceptance of $2,145,000. Aurora also borrowed from
British Mortgage & Trust Company of Stratford, to which at June 17.
1965 it owed $1,860,000 in round figures. By that date Aurora had
net amounts of $15,048,000 in the aggregate owed to it through thirty-
nine accounts shown on the chart, the history of which, and of other
accounts receivable over the period 1960 to 1965, is shown on Table
20. 2 This should be compared to the loan, lease and investment
chart with some caution because its right-hand column shows the
accounts receivable as at July 30, 1965 which was the date of Aurora's
bankruptcy. The first account, showing an amount due July 30, 1965
of $228,073 from Atlantic Acceptance and Atlantic Finance, refers
to the rental of furniture by those companies, and there are other identi-
fiable term accounts in respect of leases such as that due from Allied
1Exhibit 585.
2Exhibit 587.
83
Structure and Growth
Towers Merchants Limited in the amount of $423,892; but reference
to the condensed comparative balance sheets and income statements
at Table 21 3 will show that term accounts receivable, which roughly
correspond to the asset shown as "equipment" owned by the com-
pany and leased, is a small part of the receivables at the date of
bankruptcy which are largely notes and mortgages. Soon after the
change of ownership in 1960 when Aurora became associated with the
Atlantic group of companies its business, which was supposed to be the
leasing of equipment, noticeably changed, term accounts outstanding
being $670,000 compared with $256,000 in notes and mortgages in
1960, and at July 30, 1965 only $1,200,000 compared to $13,820,000.
Among the large loans outstanding at July 30 were $2,209,000
owing by Evermac Office Equipment Company Limited and $1,880,-
000 by Freeport International Company Limited, a Bahamian company,
both recorded for the first time at the end of 1964; $1,188,000 by
Associated Canadian Holdings Limited, a company in which Morgan
and Wagman participated with Jack Tramiel and Manfred Kapp of
Commodore Business Machines; $1,237,000 by Conarm Develop-
ments Limited, an Ottawa land development company and $1,137,500
by Belfield Investments Limited, both of which were heavily indebted
to British Mortgage & Trust Company, the security of which ranked
ahead of Aurora's. Frederick's Department Store Limited, owing finally
$476,000, may be grouped with Treasure Island Properties Limited
owing $1,520,000, Treasure Island Gardens Limited $51,500 and D. W.
Reid re White Oaks Shopping Centre $384,600, all being part of the
same enterprise to which Aurora had advanced over $2,400,000. The
amounts receivable from Valley Farm and Enterprises Limited of
$903,000, Valley Music Company Limited which disappears from the
trial balance after the year-end in 1962, and Ottawa Valley Amuse-
ments Limited, outstanding at the date of bankruptcy in the amount of
$118,300 will later be considered together. Charcoal Supply & Sales
Limited and its parent, Arcan Corporation Limited, at July 30, 1965
were indebted to Aurora in the aggregate amount of $120,000. Dallas
Holdings Limited owing $678,000, N.G.K. Investments Limited, one of
five original borrowers from Aurora as at December 31, 1960, $166,-
800, Don Mills $75,000, Hebard Holdings Limited $53,000 and Five
Wheels Limited $104,000 were, in common with other companies
indebted to the true subsidiaries of Atlantic Acceptance, owned wholly
or in part by C. P. Morgan and various associates. Don Mills was not
a corporation but a nom-de-guerre, where necessary supported by
the signatures of Tramiel and Kapp. It should be noted that Chisholm
& Company and Cushing & Company are "street names" for Lambert &
Company in New York. Several of the borrowers have been seen before
"Exhibit 586.
84
Chapter III
as owing money to Commodore Sales Acceptance, Commodore Factors
or Adelaide Acceptance, including Cimcony of Canada Limited which
appears to have been indebted to Aurora in the amount of $570,574,
though shown as owed by Cimcony Limited on the ledger account,
General Spray Service! Inc., Valley Farm and Enterprises Limited and
Valley Music Company Limited, Corporate Plan Leasing Limited, John
Belli Operations Limited, W. P. Gregory, Donald W. Reid, Frederick's
Department Store Limited and London Lighthouse Investments Limited,
this last being a company incorporated to hold the land upon which the
head office of Atlantic Acceptance was built in the outskirts of Oakville.
D.H.I. Limited, also a borrower from Commodore Sales Acceptance,
finally owed Aurora $727,773 and was affiliated with Mastino Develop-
ments Limited which was also a debtor for $163,469. Those companies
were the brain-children of Count Mastino Delia Scala.
The condensed comparative statements for Aurora Leasing, Table
21, are made up of those certified by Walton, Wagman & Co. or
Wagman, Fruitman & Lando for the years 1960 to 1964, the state-
ment for that portion of 1965 up to the date of bankruptcy having been
prepared by the Clarkson Company Limited as trustee in bankruptcy.
It will be seen that the assets, consisting of term accounts and notes and
mortgages receivable and the equipment owned by the company, rose
froirfapproximately $1,230,000 at the end of 1960 to $16,500,000 by
mid- 1965; and that the liabilities reflect the large borrowings from
Commodore Sales Acceptance, Adelaide Acceptance and British Mort-
gage & Trust previously referred to, with contributions by shareholders
and unsecured noteholders. The unsecured notes were convertible into
shares and their decline from a figure of $600,000 at the end of 1962
to $529,000 ultimately is a measure of the conversion which took place
during this period. After suffering a loss of $150,000 during 1960
Aurora became apparently more profitable, particularly during 1964,
when the net income earned rose from $46,758 to $173,590, a very
marked increase having occurred in that year in the revenue received
from both rentals and interest on loans. The item for management fees
paid requires the comment that in 1960 Aurora was deriving them from
a subsidiary company by the name of Mavety Film Delivery Limited
which was thereafter purchased by N.G.K. Investments Limited, and
Aurora, apparently losing its expertise with its subsidiary company.
commenced to pay fees to Chartered Management Consultants which,
as previously observed, operated as an adjunct to the office of Walton,
Wagman & Co. and was owned by Morgan, Walton and Wagman. One
of the penalties of Aurora's success in 1964 was the doubling of the
management fee from $12,000 to $24,000.
As in the case of the charts and schedules of a similar nature
illustrating the loan and investment position of the Atlantic subsidiaries
85
Structure and Growth
and the history of their accounts receivable, the same precautions must
be observed in considering those applicable to Aurora in that they
represent positions at a year-end, and do not reveal transactions which
took place within the confines of any particular year, as did in fact
happen in the case of Aurora during 1963. The financial statements
for Aurora Leasing exhibit certain peculiarities which require further
examination when the time comes to assess responsibility for the decep-
tive appearance created by these and other statements relating to com-
panies in the Atlantic group. Suffice it to say that there is no indica-
tion of the establishment of any allowance for bad debts in the Aurora
statements until those produced for the year 1964. The word "those"
is used advisedly in that there were two separate statements4 pre-
pared to reflect the position of the company at the end of that year,
one dated March 9, 1965 containing an unqualified opinion, and
the second dated July 8, 1965 containing a qualified report, referring
to the "taking-over of accounts receivable by Commodore Sales Accep-
tance Limited pursuant to a general assignment of book debts and the
accounts now under the control of the said creditor." Since the firm of
Wagman, Fruitman & Lando who signed this report were also auditors
in the same year for Commodore Sales Acceptance some doubt must be
entertained as to the ingenuousness of this statement, but the circum-
stances under which it was made and indeed the validity of the assign-
ment itself, which is still a matter for dispute, must await discussion in
Chapter XVII.
Sources of Atlantic Funds
This chapter has thus far been concerned with the flow of funds
from Atlantic Acceptance to its subsidiaries and the manner in which
they were lent to the public, with particular emphasis upon the record
of loans made by the subsidiary companies at 100 Adelaide Street West.
The source of those funds, which, with the ability to manage them, are
the whole substance of a sales finance company, must now be briefly
considered. Some consideration has already been given in the preceding
chapter to the early efforts of Atlantic Acceptance to obtain funds for
the purpose of lending them profitably, and mention has been made
previously in this of the issues of preference and common shares by
which public participation was sought. The following list, showing the
constituents of the shareholders' equity, appeared as Note 10 to the
consolidated financial statements as at June 17, 1965 prepared without
audit for the receiver and manager by Deloitte, Plender, Haskins &
Sells:1
'Exhibits 294-5.
'Exhibit 545.
86
Chapter III
Capital Stock
Authorized :
15,000 first preference shares, par value of $20 each, redeemable
at $22 each, with fixed cumulative dividends of $1.10 per annum
and convertible into one common share each, of which 485 have
been converted into common shares.
200,000 second preference shares, par value of $24 each, issuable in
series, cumulative, with a dividend rate not to exceed 7% per
annum, and redeemable at a price not to exceed 112% of the
amounts paid up thereon:
190,000 Series "A" and 10,000 Series "B" 6% cumulative, con-
vertible into common shares at a price of $20.81 per common
share subject to adjustment (convertible into 1.153 common
shares for each second preference share), redeemable at the follow-
ing percentages of par value:
On or before September 30, 1967 110.42%
October 1, 1967 to September 30, 1972 106.25%
After September 30, 1972 102.09%
Sinking fund requirements for Series "B" shares are as follows:
Percentage of
Outstanding Shares
to be Redeemed
Period Each Year
On October 1, 1968 through 1972 2%
On October 1, 1973 through 1977 4%
On October 1, 1978 and subsequent years 5%
60,000 third preference shares without par value, participating, con-
vertible into one common share each.
1,015,000 common shares without nominal or par value.
Issued and Fully Paid:
14,515 first preference shares $ 290,300
190,000 second preference shares —
Series "A" 4,560,000
10,000 second preference shares —
Series "B" 240,000
10,000 third preference shares 128,000
5,218,300
699,718 common shares 9,236,787
$14,455,087
During 1965, 15,000 common shares were issued on conversion of
15,000 third preference shares.2
2Lists of registered shareholdings representing more than 1% of the stock in each
category and of the directors of Atlantic Acceptance Corporation as certified by the
transfer agent, the Eastern & Chartered Trust Company, appear at Appendix D (Exhibits
164-5).
87
Structure and Growth
Moneys obtainable by the sale of the company's shares and by bor-
rowings from chartered banks were not sufficient, and can never be
sufficient to meet the needs of an expanding finance company, and much
depended in the early years upon Atlantic being able to maintain a record
of paying dividends on its preference shares for five consecutive years
to permit it to sell secured obligations of a type which would qualify
for investment by insurance and trust companies, the lending of which
was subject to statutory provisions in respect of the borrower's financial
stability, and by other investors not so regulated but who imposed
standards of their own.
The unaudited consolidated balance sheet as at June 17, 1965,
excluding its voluminous notes, is shown below:3
ASSETS
Cash on hand $ 1,320,866
Notes and Accounts Receivable — less allowance for
doubtful accounts, $6,353,885 149,188,872
Income Taxes Recoverable 556,321
Prepaid Expenses and other assets 963,385
Equipment and leasehold improvements — at cost less
accumulated depreciation and amortization, $158,495 203,482
Unamortized long-term debt financing expenses 1,080,497
Unamortized cost of developing new branches 494,385
Unamortized cost of investment in subsidiary companies
in excess of book value at date of acquisition 1,002,118
Total $154,809,926
LIABILITIES
Bank overdraft $ 969,869
Accounts payable and accrued charges 1,075,306
Dividends payable 249,430
Amounts due to dealers pending collection of accounts 1,388,528
Income Taxes 470,306
Other liabilities 5,010,000
Senior debt 106,863,340
Subordinated debt 16,798,820
Junior subordinated debt 4,351,679
T37,177,278
Unearned interest 7,535,829
Shareholders' Equity:
Capital stock 14,455,087
Deficit 4,358,268
Total shareholders' equity 10,096,819
Total $154,809,926
■Table 2.
88
Chapter III
It illustrates the proportion of total liabilities represented by senior,
subordinated and junior subordinated debt in the amounts of $106,-
863,340, $16,798,820 and $4,351,679 respectively and, under the entry
"other liabilities", the $5,000,000 owing to S.F.C.I.,4 now reinstated in
the senior debt, for an aggregate of $133,000,000. Particulars of the
senior, subordinated and junior subordinated debt in terms of issues and
amounts, not historical but shown as at the date of receivership, are to
be found as Notes 7, 8 and 9 to these statements and are as follows:
7. Senior Debt
The senior debt of the company, secured by an assignment of notes receivable and by
a first floating charge on the assets of the company, consists of the following:
Bank advances:
Payable in Canadian currency. $ 3,250,000
Payable in U.S. currency $ 4,000,000 U.S. 4,328,750
Total bank advances $ 7,578,750
Short-term notes:
Payable in Canadian currency. 29,520,135
Payable in U.S. currency 15,953,000 U.S. 17,264,138
Total short-term notes 46,784,273
Medium-term notes (now due and payable — Note 1):
Payable in Canadian currency :
5% $ 100,000
53/8% 140,000
5%% 700,000
Payable in U.S. currency:
5 % $ 2,000,000 U.S. 2,164,375
51/4% 2,000,000 U.S. 2,164,375
Total medium-term notes $ 5,268,750
Long-term notes (now due and payable — Note 1):
Payable in Canadian currency :
Series B — 6i/2 % $ 846,000
Series C — 5y4 % 600,000
Series D —5% % 400,000
Series E — 6% % 400,000
Series F — 6»/4 % 100,000
Series G— 6% % 100,000
Series H— 6% 700,000
Series I —6% 1,250,000
Series O — 6y8 % 1,500,000
Payable in U.S. currency:
Series A— 6!/2 % $3,384,000 U.S. 3,662,122
Series J —6% 2,250,000 U.S. 2,434,922
Series K— 6% 1,500,000 U.S. 1,623,281
Series L— 6% 2,500,000 U.S. 2,705,469
Series M— 6% 2,500,000 U.S. 2,705,469
Series N— 53/4% 7,500,000 U.S. 8,116,406
Series P— 6% 1,500,000 U.S. 1,623,281
Series Q — 6% 8,500,000 U.S. 9,198,594
Series R — 5 % % 5,460,000 U.S. 5,908,744
$43,874,288
Redemption premium 2,178,934
Total long-term notes 46,053,222
Accrued interest 1,178,345
Total senior debt $106,863,340
'■Royal Securities Corporation Limited v Montreal Trust Company (1967) 2 O.R. 200. —
The additional $10,000 shown under the heading "Other liabilities" represents, according
to information given to the Commission, liability in that amount to another noteholder
whose circumstances were the same as S.F.C.I. and whose security was, on consent,
subjected to the decision in this case.
89
Structure and Growth
8. Subordinated Debt
The subordinated debt of the company consists of the following :
Payable in Canadian currency :
6% $ 23,500
6i/4 % 4,500,000
Payable in U.S. currency:
6I/2 % $2,259,000 U.S. 2,434,921
6|/2% 782,000 U.S. 846,271
6% 3,478,000 U.S. 3,763,848
6i/4% 2,340,000 U.S. 2,532,319
6V4% 2,000,000 U.S. 2,164,375
$ 16,265,234
Redemption premium 401 ,270
Accrued interest 132,316
Total subordinated debt $ 16,798,820
9. Junior Subordinated Debt
The junior subordinated debt of the company consists of the following:
Payable in Canadian currency:
6i/2% $ 1,000,000
6% % 400,000
63/4% 150,000
Payable in U.S. currency:
6% $2,000,000 U.S. 2,164,375
61/2% 500,000 U.S. 541,094
4,255,469
Accrued interest 96,210
Total junior subordinated debt $ 4,351,679
It will be seen that over a third of this debt consists of $46,784,000
in short-term notes to which $5,010,000 must be added. Four sched-
ules in relation to the notes outstanding help to explain the inci-
dence and history of this debt. The first, prepared by Atlantic, is Table
225 and shows short-term secured notes outstanding as at June 30,
1965. Since none were paid after default on June 14, it may be re-
garded as representing the position at June 15, 1965, excluding notes
in the amount of $2,400,000 which were paid the previous day. The
second is Table 23, 6 also prepared by the company, and is a schedule
of short-term secured notes outstanding, showing those maturing on
demand and those maturing on June 14, up to and including June
25, 1965, this being one of similar documents supplied from time to
time by McFadden to the Toronto-Dominion Bank. The third and
fourth schedules were put into evidence by Mr. Abell7 when he first
testified on March 7, 1966, but, being prepared for his report, may be
more conveniently referred to as annexed to it in Chapter XIX where
Table A shows Atlantic Acceptance Corporation short-term notes out-
standing to the nearest thousand dollars, excluding Canadian bank loans
but including loans from United States banks, and Table B shows
Atlantic's short-term notes outstanding at month-ends, including bank
loans, beginning with December 1963 and ending at June 14, 1965.
BExhibit 588.
"Exhibit 591.
Exhibits 589-90.
90
Chapter III
The maturities on June 15 amounted to $6,908,000 of which $3,550,-
000 were U.S. funds, and on June 16 to a total of $2,100,000 of which
$1,000,000 were U.S. funds. The demand note position according to
Table 22 was $8,100,000, including $650,000 U.S., and it may be
observed that the aggregate figures given treat the United States dollar
as equivalent to the Canadian. It should also be noted, in comparing the
figures shown on the company's schedule with the Abell figures, that
Table 22 shows the position after June 30 and the figures in Chapter
XIX show it at June 14.
Table 22 shows not only the holders of the notes but the dealers
through whom they were purchased when they were not purchased
directly from the company, and here it must be emphasized that in the
considerable history of Atlantic's operations in the money market this
table only illustrates the position of short-term notes outstanding at one
point in time and the maturities thereafter. The first entry, showing the
Toronto-Dominion Bank holding a note for $1,250,000 payable on
demand, is that minimum lending by the bank required by the provisions
of the trust deeds. The company's bank line with the Royal Bank of
Canada is illustrated by two demand notes each for $1,000,000 and
the $750,000 demand note held by Commodore Sales Acceptance
represents the latter's line of credit with the Bank of Nova Scotia. The
holdings by Great Northern Capital Corporation of demand notes in
the aggregate amount of $300,000, Home Smith Properties Limited of
$900,000" Humbria Limited of $50,000 and Lambert & Co. with a note
maturing August 18, 1965 for $500,000 U.S. funds, represent the
extent to which the owners of the controlling interest in Atlantic were
involved with this type of obligation.
The Montreal Trust Company's definitive list as trustee of holders
of short-term, medium-term and long-term notes, under the classifica-
tions of senior, subordinated and junior subordinated debt, was also
entered in evidence/ and since it is an important part of the record it
is annexed as Appendix E. Here may be seen the imposing names of
sophisticated investors from all parts of the continent, not including, of
course, the names of those who held coupon notes. Here may also bo
seen, side by side with those of great corporations, the names of the
registered holders of the $4,500,000 6lA% subordinated notes — first
series, due June 1, 1983; their holdings were mostly in small amounts
totalling $869,000, many of them being in the order of $1,000. $2,000
and $3,000, most of them being individuals and small estates resident
in Canada. This being only part of the record of those small investors
looking for a higher yield on a modest capital, and reassured in many
cases as the Commission's correspondence tile makes plain, by reputable
dealers and bank managers, makes unpleasant but necessary reading.
As the next chapter will establish, and is now widel} known, their loss
was absolute.
"Exhibit 99. 9 j
CHAPTER IV
The Loss
Estimate of Montreal Trust Company
The order made by Mr. Justice Parker on June 17, 1965 appointing
Montreal Trust Company, trustee under the provisions of the various
trust indentures securing Atlantic notes, as receiver and manager1 was
interlocutory in an action brought by it against Atlantic Acceptance
Corporation. The defendant consented to the trustee's application and
made over to the latter all its undertaking, property and assets, and all
documents and records relating to them. Armed with the extensive
authority thus obtained the receiver and manager took three preliminary
steps. It engaged Deloitte, Plender, Haskins & Sells, the head auditors
of Atlantic to make a quick review of the large loans made by the
company and its subsidiaries using the available records at the head
office in Oakville and at 100 Adelaide Street West in Toronto, their
report on which was made on the evening of Friday, June 18. As a
result of its disturbing nature, the Deloitte firm was asked to prepare the
financial statements as at June 17 already discussed2 and the task of
examining the accounts receivable of Commodore Sales Acceptance,
Commodore Factors and Adelaide Acceptance was given to Clarkson,
Gordon & Co., chartered accountants, and its affiliated firm the Clarkson
Company Limited, liquidators and licensed trustees in bankruptcy. Then
it accepted the offer of General Acceptance Corporation of Allentown,
Pa., which has been seen as first on the doorstep of the directors of
Atlantic on the day after default among the several companies interested
in acquiring its receivables, to make, in Mr. Haxton's words, "an opera-
tional audit" of the Atlantic companies and to report on their value as
a going concern and with a view to acquisition. This report was
delivered on July 14 through the medium of General Acceptance's
Exhibit 784.
•Exhibits 545-6.
92
Chapter IV
subsidiary company, G.A.C. International Acceptance Corporation
Limited,3 and the Deloitte report on August 10. With these, and with
what had been gleaned by a large audit group organized by Clarksons,
a report of the receiver and manager was prepared and printed in the
course of a week, and issued over Mr. Haxton's signature on August 18.
This model of concise expression was sent to the shareholders at the
time and was put into evidence by Haxton when he was examined
before the Commission on March 10, 1966.4 By August the trust
company must have felt justified in making the decision to place Atlantic
Acceptance in receivership. The G.A.C. International report had
produced an abundance of disquieting information about the inadequacy
of Atlantic's records, the quality of its loans and the defects of its
management, ending with the staggering observation that the allowance
for bad debts on a consolidated basis should be increased by more than
ten times what was shown on the books to an estimated figure of
$38,484,000. Although General Acceptance's figures as given on the
pro forma balance sheet attached to its report may have been uncon-
sciously influenced by the bias of a prospective purchaser, the observa-
tions in detail which it contained on management procedures, records,
security for loans and the like were pertinent and illuminating. Without
doubt they contributed to the views expressed by Haxton in his testi-
mony referred to hereafter.
The report of the receiver and manager of August 18 contained
a statement of condition, as at June 17, 1965 of Atlantic Acceptance
and its subsidiary companies and is reproduced overleaf. It is designed
to show what net assets are available to creditors as compared with
their claims, and the assets which are listed as to notes and accounts
receivable allocated to the various companies together with cash on
hand and other items are expressed under two heads; book value and
estimated realizable value. It will be seen by comparing these two
columns that although the book value of notes and accounts receiv-
able are expressed as net, the receiver and manager by mid-August had
reached, as a result of its own investigations and that of its agents,
sombre conclusions about their real worth. The net receivables of
Atlantic Acceptance of $57,771,161 from loans made in the public
sector, as distinct from those made to its subsidiaries, are further written
down to $54,000,000 as estimated realizable value. Atlantic Finance's
reduction was only from $35,199,946 to $35,000,000 but the Com-
modore group of companies suffered drastically in this process. The
net book value of the receivables of Commodore Sales Acceptance
shown at $35,719,586 plunged to $13,500,000, of Commodore Factors
from $10,915,899 to $3,000,000 and of Adelaide Acceptance from
$4,778,391 to a mere $700,000. Those of Standard Discount with a
"Exhibit 785.
'Exhibit 786.
93
The Loss
atlantic acceptance corporation
LIMITED
and subsidiary companies
MONTREAL TRUST COMPANY
Receiver and Manager
STATEMENT OF CONDITION
as at June" 17, 1965
Estimated
assets available to creditors Book Value Realizable
Value
Cash on Hand S 1,320,866 S 1,320,866
Notes and Accounts Receivable — net
Atlantic Acceptance Corporation Limited. . . 557,771,161 54,000,000
Atlantic Finance Corporation Limited 35,199,946 35,000,000
Commodore Sales Acceptance Limited 35,719,586 13,500,000
Commodore Factors Limited 10,915,899 3,000,000
Adelaide Acceptance Limited 4,778,391 700,000
Standard Discount Corporation Limited 3,816,200 2,800,000
Other Subsidiaries 987,689 980,000
Total Notes and Accounts Receivable
—net 149,188,872 109,980,000
Income Tax Recoverable 556,321 556,321
Prepaid Expense and Other Assets 963,385 400,000
Equipment and Leasehold Improvements 203,482 100,000
Unamortized Costs and Expenses 2,577,000 —
Total Assets Available to Creditors .... 154,809,926 112,357,187
LESS
Unearned Interest 7,535,829
Due to Dealers Pending Collection of Accounts . 1,388,528 8,924,357 8,924,357
NET ASSETS AVAILABLE TO CREDITORS 145,885,569 103,432,830
Liabilities to Senior Noteholders (Note) 106,863,340 106,863,340
Surplus (Deficiency) 39,022,229 (3,430,510)
Liabilities to other creditors
Subordinated Noteholders 16,798,820
Junior Subordinated Noteholders 4,351,679
Other Creditors (Note) 7,774,911 28,925,410 28,925,410
Surplus (Deficiency) " S 10,096,819 $(32,355,920)
NOTE: Liabilities to Senior Noteholders does not include claims under litigation for rein-
statement of Senior Notes totalling 55,010,000
book value of $3,816,200 were estimated to realize $2,800,000 and
all the other subsidiaries, including Premier Finance which accounts for
$600,000 in both columns, declined slightly from $987,689 to $980,000.
By comparison of the book value aggregate of $149,188,872 with the
estimated realizable value of $109,980,000 there was a further reserve
against losses, over and above that stated in the accounts, of $39,200,000,
roughly $700,000 more than the figure forecast in the G.A.C. Inter-
national report. The unamortized cost and expenses which consist of
long-term debt financing expenses, the cost of developing new branches
and the cost of investment in subsidiary companies in excess of book
value at date of acquisition, are under the circumstances of the com-
pany's plight entirely written off, but income tax recoverable is shown
in excess of $550,000 arising out of overstatement of profit in previous
94
Chapter IV
years and subsequent application of losses recognized in 1965. In sum
$112,357,187 appears as the estimated realizable value of the total
assets available to creditors in comparison with the book value of
$154,809,926. From this amount was deducted the unearned interest
and dealer's reserves in the amount of $8,924,357, leaving net assets
for creditors expected to be realized of $103,432,830. This falls short
of the liability to the senior noteholders of $106,432,830, without
adding in the principal and interest of the S. F.C.I, note, by $3,430,510.
After taking into account claims of other creditors including the sub-
ordinated and junior subordinated noteholders, an apparent surplus of
$10,000,000 at book value becomes a deficiency in net assets of
$32,355,920.
The statement of condition, in setting out the liabilities to creditors,
does not include the interest of the shareholders which must be added
to give a complete picture of the loss calculated on this basis at this
time. Shareholders' equity varies in value from time to time, but for
this purpose it must be taken from a period when Atlantic was ostensibly
a going concern and not at a point, or after a point, when default had
blighted its prospects. The most recent quarterly report of the com-
pany's position before default was for March 31, 1965 and valued the
shareholders' equity at $16,079,747, the addition of which raises the
total deficit as estimated at June 17 to $48,435,667. So much for the
oft-repeated contentions of C. P. Morgan in the month of June that
Atlantic had ample assets with which to meet all claims. The picture
presented barely two months after the failure of his company to meet
a small fraction of its obligations revealed that only the holders of
senior secured notes, who by virtue of their security ranked ahead of all
other creditors, could expect to recover anything at all. Although it
appeared in mid-August that their recovery would be substantial it
would certainly fall short of the amount of their claim, but how far
short was not yet established. Nor did the holders of subordinated debt
readily abandon the field. Their hopes rested on two contentions: any
form of liquidation which would diminish the assets to the point where
there was no residuum available to meet their claims was unjustified,
and all notes issued after June 30, 1964 should be declared invalid, a
theory of constructive default ante-dating by many months the event
of June 14, 1965. Even the senior noteholders were loath to see the
claims against the available assets increased by the reinstatement of the
note held by S. F.C.I, which had been surrendered to and cancelled by
the trustee, and, represented by Atlantic Sugar Refineries Limited,
resisted the plaintiff's claim in Royal Securities v. Montreal Trust
(supra). But the vicissitudes of the receivership are not within the
scope of this report except as they affect the measurement of loss and
recovery. They are briefly treated in the receiver and manager's memor-
andum as to initial award of compensation, prepared for submission to
95
The Loss
the Supreme Court of Ontario and dated November 17, 1966,B which
was entered in evidence before the Commission on May 30, 1967 and
is annexed as Appendix F.
Evidence of J. G. Haxton
Mr. Haxton's evidence was given to the Commission some seven
months after the appearance of the report which he signed on August
18, 1965,1 and he was thus able to describe what in the course of the
receivership had been revealed as to the nature and quality of Atlantic
assets and to give a revised estimate of loss. The loans of Atlantic
Acceptance Corporation in the public sector, with a net value of
$57,771,161, had been advanced in the gross amount of some $60,500,-
000 from 35 offices across Canada in every province except Quebec
in categories which are illustrated in percentage proportions as follows:2
Automobile 1) Retail 47%
2) Wholesale 11
3) Capital 3
Industrial and Heavy Equipment 7
Large Loans 14
Furniture and Appliances 7
Home Improvement 4
Mobile Homes 3
Livestock 3
Miscellaneous 1
100%
Apart from a tendency to lend on older cars than a prudent and,
above all, a well-established sales finance company would be expected
to regard as desirable security, that portion of the portfolio represented
by retail automobile financing was conventional enough; but the whole-
sale loans made to automobile dealers to finance their inventories of
new and used cars in the order of 11% exhibited many signs of im-
providence. These loans, made to enable a dealer to purchase his
stock-in-trade, require a specific repayment whenever a vehicle is sold,
and the incidence of sales in which no remittance had been made to the
lender, or sales "out-of-trust", was high, a situation well known to the
company's officers at Oakville and in the branches. Their favourite
solution was the easy-going expedient, in cases where dealers were in a
precarious financial position, of creating a capital loan for the credit of
the dealer's wholesale account, secured by a floating charge debenture
or second or third mortgage, the value of which was generally ques-
tionable. The percentage of capital loans in the automobile category,
'Exhibit 4715.
'Evidence Vol. 7.
'Exhibit 786.
96
Chapter IV
although not high, amounted to some $1,800,000 and embraced sub-
stantial "out-of-trust" situations, reflecting a significant preoccupation
with the creation of assets regardless of the state of delinquency of
individual loans. Large loans amounting to 14% of the whole were to
an unusual extent outside the ambit of normal sales finance, with borrow-
ers in apartment house and "motel" construction, and bowling alley and
restaurant equipment businesses; a notable concentration of the apart-
ment and motel loans was in the province of Alberta. Many of these
were delinquent and were restored to currency by additional advances in
the last ninety days before Atlantic's default. Home improvement lend-
ing was generally of poor quality, unduly devoted to financing the sale
of aluminum siding as an embellishment of residential housing, an
exploitation of a current fad by unscrupulous salesmen not unlike the
promotion of the "Coronet" and "Premier" television sets of earlier days.
The category of "mobile homes" refers to the large residential trailers
much in use by the transient population of oil fields and mining camps,
and the livestock loans must be further considered in relation to the
affairs of Valley Farm and Enterprises. Generally speaking, in this
area of Atlantic's lending there was a lack of credit information and a
looseness of supervision at the head office, reflected and magnified at the
branch level where managers had more than ordinary discretion to make
loans on their own authority. Of the reservation for unearned interest
and dealers' holdbacks shown as $8,924,357 about $4,500,000 was
attributable to these Atlantic Acceptance loans. Haxton stated that as
a result of closer examination of the individual accounts an even larger
"factual reserve" would have to be conceded. His estimated realizable
value, after seven months experience of these receivables, had been revised
downward from $54,000,000 to a maximum of $43,600,000 and a
minimum of $40,300,000.
The lending of Atlantic Finance Corporation, conducted through
105 branches and having a net book value of $35,199,946 at the date
of receivership, was made up of some 53,800 accounts provided as
follows:
Small loans (up to $1,500) 53% 37,400 accounts
Large loans (over $1,500) 39% 6,000 accounts
Furniture and Appliances 8% 10,400 accounts
100% 53,800 accounts
This portfolio, as the statement of condition indicated, presented
the best chance of recovery estimated to be $35,000,000, the portion of
the reserve for unearned interest attributable to it being $2,000,000.
From a net estimate of recovery of $33,000,000 the receiver and man-
ager contemplated a further reservation against loss, as a result of recent
operating experience, of $2,300,000 and an increase in the reserve for
97
The Loss
unearned interest as at December 31, 1965 of $1,000,000, with the
result that the high estimate of recovery at the time of Haxton's testi-
mony appeared to be $29,700,000 and the low $29,000,000. Although
Atlantic Finance's receivables had all along appeared to present the best
chance of recovery by sale of the business as a going concern, certain
weaknesses were discovered. Expansion in the order of fifty branches
since the beginning of 1964 had infected this company's lending policy
with the "crescendo" virus and much value had been sacrificed to
volume. Loans, for instance, had been made by Atlantic Finance for
the purpose of providing down-payments on automobiles financed by
Atlantic Acceptance as to the balance with a consequent lack of buyer's
equity. Loans of this type had been made to minors, as had loans to
finance the purchase of popular musical instruments and chattels un-
acceptable as security to established sales finance companies. Atlantic
Finance also had suffered in the case of loans over $1,500 from the
calculation of the cost of acquisition at 40% of the pre-computed inter-
est, and particular care was taken to adjust the reserve for unearned
interest with negotiations for sale in mind.
The most grievous and spectacular losses were, of course, sustained
by the Adelaide Street subsidiaries of Atlantic and particularly by Com-
modore Sales Acceptance Limited and Commodore Factors Limited
which C. P. Morgan operated with the assistance of Albert George
Woolfrey and four clerks. Woolfrey, who testified before the Commis-
sion on five occasions, and whose name will appear hereafter from time
to time, was a book-keeper brought to Toronto in the spring of 1960
from London, Ontario where he had been employed by a company
called Mor-For Distributors Limited. The capital of this company con-
sisted of three common shares issued for a consideration of $1 each to
C. P. Morgan. G. Warren Armstrong, who has been encountered before
as first solicitor and an early shareholder of Atlantic Acceptance, and
C. J. Foran of Fleetwood Financial Corporation Limited, Atlantic's
original underwriter. It was in the business of selling imported china
and distributing stainless steelwares and was incorporated in 1955 when
Morgan was still an employee of International Silver Company of Can-
ada, discounting thereafter its conditional sales contracts with Atlantic
Acceptance at one of the hitter's branch offices in Hamilton,3 and being
from time to time in a position of delinquency on recourse. Morgan
and Woolfrey worked under circumstances and by methods unknown to
even the most senior members of the staff at Oakville and uncompre-
hended even by such a familiar of the executive offices as McFadden.
Woolfrey spent his first months in the office of Walton, Wagman & Co.
and at the elbow of Harry Wagman. before moving to 100 Adelaide
Street West to become the "director of operations" of Commodore Sales
Acceptance. From time to time employees of Chartered Management
"Evidence Volumes 43 and 102.
98
Chapter IV
Consultants intervened to make "field audits*' in the case of difficult
acconnts.
In the Adelaide Street subsidiaries the weaknesses and deficiencies
noted in the supervision and control of loan accounts by Atlantic Accept-
ance and Atlantic Finance were exaggerated to the point of being
grotesque. The prevailing inadequacy of records, especially of credit
information, the dubious quality and frequent non-existence of security
for advances made, the toleration of and, indeed, encouragement of delin-
quency on a large scale, concealed by the capitalization of arrears of
interest and other less palatable activities of the management of these
companies, must await fuller treatment and consideration when the role
of their auditors and the operation of their accounts is examined in the
light of the evidence of the Commission's accountants. Let it suffice that
the receiver and manager was early aware of the existence of very large
loans, unsecured or made on doubtful security, to corporations which
no one had ever heard of with a particularly heavy concentration of
some SI 2,000,000 in loans made by Commodore Sales Acceptance and
Adelaide Acceptance, either directly or through Aurora Leasing Cor-
poration, to Dalite Corporation (Canada) Limited, Masco Construction
Company Limited, L.B.H. Management Limited and Daylitc of Grand
-Rahama44mitpHf^11 of whom had either a share interest in or substantial
accounts receivable from Lucayan Beach Hotel and Development Limited
and whose operations were bound up with that company's venture on
Grand Bahama Island. Some sixteen bankruptcies attended its efforts
to collect from borrowers in this connection. All of the fifteen Groship
companies, owing 53,176,639 to Commodore Sales Acceptance, were
petitioned into bankruptcy for a total recover}' of $80,000. The same
company's advances to Racan Photo-Copy Corporation of $461,000
produced collections of only $15,000. Bankruptcy action against Fred-
erick's Department Store Limited in respect of a loan by Adelaide
Acceptance of $600,000 resulted in recover}' of $175,000. By March
1966 action taken by the Clarkson Company on behalf of the receiver
and manager to collect the accounts receivable of the Adelaide Street
group had recovered a total of $3,560,000.
Nevertheless the Montreal Trust Company had high hopes for the
future of Lucayan Beach Hotel, hopes which had formerly been ex-
pressed with almost passionate conviction by C. P. Morgan. The deter-
mination of the receiver and manager to continue its operation, and
indeed to invest a further $3,000,000 of Atlantic funds to acquire addi-
tional stock in Lucayan Beach Hotel and Development Limited in order to
raise Atlantic's position from that of a minority shareholder to that of
owner of some 93 c'c of the voting stock of the company, is impi .
evidence of how high they were. In consequence the estimates of recov-
ery for the receivables of the Adelaide Street subsidiaries are subject to
wide variation, a condition further aggravated by four cases of defective
"*" jOcxy J i + ©- cj -
The Loss
security, three affecting Commodore Sales Acceptance and one Adelaide
Acceptance; the most serious of these involved an assignment of book
debts given to the former by Aurora Leasing Corporation and jeopard-
ized the recovery of some $2,000,000. The estimated realizable value
of the group's receivables, which in August 1965 appeared to be about
$17,200,000, was after the experience of seven months considered high,
and should be offset in the event of adverse results, particularly in the
Bahamas, by a low estimate of $6,250,000. After the same period there
was no reason to believe that the recovery from Standard Discount Cor-
porations receivables would be any less than $2,800,000, but the figure
of $980,000 assigned in the statement of condition for the other sub-
sidiaries, including Premier Finance, might be conservatively lowered to
$600,000.
Estimate of Loss at March 10, 1966
To summarize the forecast of the receiver and manager at the time
when he testified, Haxton produced and filed a statement1 reproduced
below which showed that the original $48,435,667 deficiency illustrated
in its report of August 18, 1965 should be restated as a potential loss of
between $50,000,000 and $64,000,000.
Estimate of loss using the allowance for losses recorded by the Company at March 31, 1965,
and the assets recorded on the unaudited balance sheet as at June 17, 1965.
(000's omitted)
Assets as at June 17, 1965 per statement $154,810
Add loss allowance per statement 6,354
161,164
Less allowance for losses at March 31, 1965 2,976
$158,188
Deduct — unearned interest $7,536
dealer's reserve 1,388 8,924
Net Assets shown as available $149,264
Recovery Estimated High Low
Other Assets per Statement
Cash $1,321
Tax 556
Prepaid expense 400
Equipment 100 $ 2,377 $ 2,377
Atlantic Acceptance Loans to public 43,600 40,300
Atlantic Finance 29,700 29,000
Standard Discount 2,800 2,800
Premier Finance 600 600
Commodore Group 17,125 6,250
Recovered to date — Commodore 3,561 3,561
$ 99,763 $ 84,888
Net Assets $149,264 $149,264
Less Recovery 99,763 84,888
LOSS $ 49,501 $ 64,376
Estimated Loss is between 50 millions and 64 millions. No account has been taken of potential
recoveries from litigation and other claims and no allowance has been made for the expense
of receivership.
March 10, 1966
•Exhibit 787.
100
Chapter IV
Some explanatory observations are necessary. To arrive at the
figure for gross assets at June 17, 1965 the receiver and manager
added back the augmented allowance for bad debts of $6,354,000
to the assets shown on the Deloitte, Plender & Co. statement of
$154,810,000, and then reinstated the allowance originally shown
by the company on the quarterly statement of March 31, 1965 of
$2,976,000 to arrive at a total of $158,188,000. From this were de-
ducted unearned interest and dealers' reserves to reach a net asset valu-
ation of $149,264,000, as compared to $145,885,569 in its statement
of condition as at June 17, 1965. The expected recovery is divided
between high and low estimates in amounts which have already been
referred to, and two entries only, which do not vary, require further
comment. The first is the figure of $2,377,000 which is the total of
assets other than accounts receivable, and the second is the amount of
$3,561,000 which, as already noted, had been recovered from the receiv-
ables of the Adelaide Street group. Some idea of the expenses of receiv-
ership, which have not been taken into account in the estimate of loss,
may be obtained by referring to the receiver and manager's "Memo-
randum as to Initial Award of Compensation"2 where the estimate as at
November 17, 1966 for the total payable to it and to its agent, the Clark-
son Company, out of Atlantic funds during the course of the receivership
was $2,925,000, plus the fees of counsel and solicitors which, on the
basis of subsequent reports, may well be upwards of $600,000.
Subsequent Reports of the Receiver and Manager
On August 3, 1966 the first formal statements were issued for
"Atlantic Acceptance Corporation Limited — in Receivership" for the
period ended December 31, 1965.1 These statements were examined
but the auditors, Price, Waterhouse & Co., were unable to express an
opinion on them, "because of the uncertainties in determining the esti-
mated realizable value of certain important assets". The statements
seemed to confirm the worst estimate of Mr. Haxton's earlier testimony
by showing a deficiency in net assets of $52,204,233, or a total loss of
$68 millions after wiping out the shareholders' equity at March 31, 1965
of $16,079,747. Thus the total deficit at this point appeared to be
$68,283,980, a figure which included "current loss" of $279,465. It will
be noted that "current losses" accumulate during the receivership largely
as a result of the continuing accrual of interest on the outstanding debt
which cannot be met by the interest taken in by the receiver and
manager.
The receiver and manager's "Memorandum as to Initial Award of
Compensation",2 issued on November 17, 1966 and referred to earlier,
2Appendix F.
'Exhibit 2920.
'Appendix F.
101
The Loss
included a section entitled "Financial Condition" which presented a pro
forma balance sheet as at August 31, 1966. This statement continued
to show an asset deficiency in excess of $52 million and was prepared,
as it is said, "for the purpose of establishing the tangible assets position of
the receivership at that date and to reflect the potential recovery for
creditors".
It reflects indeed the dramatic change in the direction of liquidity
as a result of the stewardship of the Montreal Trust Company, showing
cash and deposit receipts in the order of $54,000,000; shares of Great
Northern Capital Corporation Limited valued at $700,000, which were
received in exchange for all the shares of Commodore Sales Acceptance,
a transaction which enabled the purchaser to secure the benefit of a sub-
stantial tax loss and a corporate shell, the name of which was changed
to Home Smith Developments Limited; notes of General Acceptance
Corporation valued at $12,427,511, taken apparently in payment for
nearly $20,000,000 worth of outstanding sales finance receivables of
Atlantic Acceptance as at June 30, 1966 at a discount of 27%, less
unearned interest and dealer reserves; a residuum of miscellaneous
accounts receivable of $811,675; income tax recoverable in respect of
the years prior to 1965, $467,229, (in connection with which it should be
said that the receiver and manager expects additional recoveries exceed-
ing $100,000); investment in subsidiary companies' shares at cost, less
amounts written off of $3,695,154, — about which there is a note to the
effect that this reflects the value of receivables still held for collection in
the subsidiary companies; and advances of $17,667,766; all of which,
together with small miscellaneous items, amount to total assets of
$89,545,100. The cash and deposit receipts item includes the sale of
85% of the receivables of Atlantic Finance Corporation, and the amount
for "advances" must include those made to what is described as the
"Lucayan Beach complex, Treasure Island group, and Conarm Develop-
ments Limited" which, the memorandum indicates, the receiver and man-
ager has continued to operate and to which "it has been necessary to
advance substantial additional funds". Presumably this very large figure
also includes the valuation of the Lucayan Beach Hotel carried on the
books of the receivership.
In summary the receiver and manager says that the total assets
represent "a conservative estimate of recoveries for the senior notes (be-
fore deduction of receivership expenses)" and the senior debt is shown
to have grown by the accrual of interest to $118,903,291. This state-
ment also shows a valuation for capital stock of $14,455,087, rather than
the figure of $16,000,000 odd agreed to by Haxton as an ingredient of
the loss. If the implied adjustment is made and to it is added the cost of
receivership estimated in terms of compensation for Montreal Trust
Company and the Clarkson Company plus solicitors' and counsel fees,
an estimate of loss at that date of $71,000,000 is only too easily reached.
102
Chapter IV
During the period of the Commission's investigation, and prior to
the publication of this report, financial statements of the receivership,
also audited by Price, Waterhouse & Co., have appeared for the years
ended December 31, 19663 and December 31, 1967.4 Those for
December 31, 1966 reflect an upward adjustment in the estimated real-
izable value of Atlantic's assets of a net amount of $3,037,608. None
the less, interim costs of the receivership amounting to $2,154,812 and
its operating loss for the year in the amount of $2,805,159 more than
offset this favourable development; so that the apparent loss increased to
$68,581,683. At the end of the following year, December 31, 1967, a
similar picture was presented; the prospects of realization of the remain-
ing assets had improved to the extent of $1,773,647 but the operating
loss for the year amounted to $2,758,221, and the deficit in consequence
stood at $69,566,257. These operating losses did not, according to the
auditors' report, include Atlantic's share of the accumulated losses of
Lucayan Beach Hotel and Development Limited, stated to be at September
30, 1967 approximately $2,100,000. Moreover the receiver and man-
ager, in its interim report of November 13, 1968, expressed its intention
to apply to the Supreme Court of Ontario for a further interim advance
of compensation in 1969 and since the financial statements of the receiv-
ership for the fiscal years 1966 and 1967 did not appear until August of
the years following, the situation at December 31, 1968 is not likely to
be disclosed before August 1969, or after the completion of this report.
The Imponderables
In the meantime two factors militate against an early winding-up
of the receivership and the determination of the final loss to the holders
of Atlantic obligations and securities. On April 18, 1966 Connecticut
General Life Insurance Company, holder of senior long-term notes
of Atlantic Acceptance Corporation in the principal amount of
$2,000,000 and $1,000,000 of junior subordinated debt, commenced an
action against Montreal Trust Company, as trustee under the trust in-
denture dated February 1, 1961, to invalidate all the senior notes issued
after June 30, 1964 on the grounds of breach of a covenant of Atlantic
and the trustee that the company would not issue any notes or preferred
shares if the aggregate principal amount of consolidated debt exceeded
350% of the sum of the company's consolidated net worth, less the book
value of its fixed assets, plus the aggregate principal amount of sub-
ordinated debt. Should the action succeed some 70% of the senior notes
outstanding at June 17, 1965 would be disentitled to the security of
the trust indenture, and holders of senior, subordinated and junior sub-
ordinated notes issued prior to the alleged date of default would be en-
titled to priority in the distribution of the assets. Since the accounts of
"Exhibit 4914.
'Exhibit 5123.
103
The Loss
the receivership contemplate the whole amount realized on the consoli-
dated assets of Atlantic being available for application against the senior
debt, which at December 31, 1967 amounted with accrued interest to
$127,768,562, compared with subordinated debt of $19,353,857 and
junior subordinated debt of $5,024,799,* it is clear that a final distribu-
tion must be postponed until the settlement of this action or its disposal
at trial. By the end of 1968 no date for trial had been set and the deter-
mination of this issue is not probable by the time this report is presented.
In the second place the sale of the Lucayan Beach Hotel, in which the
receiver and manager had invested by December 31, 1967 $10,576,592
of Atlantic assets, has not been completed and, although the interim report
of November 13, 1968 expresses guarded optimism as to the possibilities
of sale and announces the termination of the lease-management agree-
ment under which the hotel had been operated for the past three years
and the conclusion of a new and more advantageous arrangement, a
number of considerations affecting the future of this enterprise must be
taken into account. The change of government in the Bahama Islands
in January 1967 at first appeared to threaten the licensed gambling
activities in that area of Grand Bahama Island, alienated for ninety-nine
years to foreign promoters by the Hawksbill Creek Act and without
which the attractiveness of the featureless island as a tourist resort could
be greatly reduced. One result was a sharp and almost punitive increase
in taxes on gambling casinos, causing the abandonment of at least one on
Grand Bahama and the temporary closing of the casino operated in the
precincts of the hotel itself from which it derives a rental of $600,000
per annum. Another result was the appointment of a Commission of
Inquiry on March 4, 1967 to investigate gambling activities in the
Colony which, by the end of that year, had presented a report casting a
strong and unfavourable light on a situation already illuminated by the
most lurid publicity in the American press; this report will be referred to
in some detail in Chapter IX, dealing with the venture of Atlantic Accept-
ance in the development of Lucayan Beach. There are, however, signs
that the new Bahamian government is unwilling to create a serious dis-
turbance of licensed gambling on which it is believed that the burgeon-
ing tourist business of the colony largely depends, and the influences
which operated so successfully upon the previous administration are still
in a position to bring heavy pressure upon its successors.
A Conservative Estimate
A reasonable estimate of the eventual loss to the noteholders and
shareholders of Atlantic Acceptance Corporation can therefore only be
taken in the face of these imponderables and the possibility of un-
expected windfalls and setbacks. An example of the former was the
Exhibit 5123.
104
Chapter IV
rapid and unexpected appreciation in the value of the shares of Great
Northern Capital Corporation received in exchange for those of Com-
modore Sales Acceptance and carried on the books of the receivership
at $700,000 for the past three years; these have been recently sold for
slightly over $2,000,000. No attempt has been made to estimate the loss
to the other creditors of companies made bankrupt as a result of efforts
to collect Atlantic's debts, and the loss suffered by British Mortgage &
Trust Company, as a result of its investment in what has been described
as the "Atlantic complex", is separately treated in Chapter XV, which
describes how that company escaped insolvency by a hair's breadth but
lost its identity and the reputation of eighty years in the process. On the
whole the history of the receivership has shown recovery generally co-
inciding with Mr. Haxton's highest estimate of the loss which must be
expected by the noteholders and shareholders of Atlantic Acceptance
and may be reasonably fixed at $65,000,000 at the time of writing, with-
out making any allowance for the costs of the receivership or for the
losses suffered by other persons and enterprises in the wake of and as a
result of the largest and most damaging commercial failure in Canadian
history.
105
CHAPTER V
Three Acquisitions
1. COMMODORE SALES ACCEPTANCE LIMITED
2. AURORA LEASING CORPORATION LIMITED
3. ADELAIDE ACCEPTANCE LIMITED
Jack T ramie! and Manfred Kapp
The sixth annual report of Atlantic Acceptance Corporation for the year
ended December 31, 1958 was dated March 26, 1959 and contained,
as will be recalled, an expression of its president's intention to acquire
an interest in a factoring company. Some three weeks previously he had
already created the vehicle which Atlantic was to acquire and had called
it Commodore Sales Acceptance Limited, thus suggesting the name of
the first company to be financed with Atlantic money against the pledge
of its accounts receivable and bringing on to the stage two people who
were destined to play a large part in Atlantic's affairs. Commodore
Portable Typewriter Limited (later to become Commodore Business
Machines (Canada) Limited) was incorporated in October 1958 as a
result of the efforts and to fulfill the requirements of Jack Tramiel and
Manfred Kapp whose background and experience require brief notice.
According to the account given by Tramiel in his sworn evidence to the
Commission on November 30, 1966 he was born on December 13,
1927 in the city of Lodz in Poland and spent the years from 1940 to
1945 in a German concentration camp where he learned to speak
German. Other official sources, relying on information supplied by
himself, indicate that his name was originally Kaufmann Idek Tramiel
or Tramielski and that he was born on September 13, 1927 or December
106
Chapter V
13, 1928. He has said that he was in concentration camps from 1939
to 1945, and, on his application for a United States visa, that he lived
in the ghetto at Lodz until June 1944 thereafter being confined in
Auschwitz and Bergen-Belsen. He appears to have entered the United
States in 1947 and to have been in the United States Army from 1948
to 1950 when he was a cook and for less than a year in 1951-2 when he
was a typewriter repair man. Between his tours of duty in the army and
for a time after his second tour he worked for a company called Ace
Typewriter Repair Company and between 1952 and 1954 drove a taxi-
cab in the city of New York, a fact not divulged to the Commission when
he was asked about his employment record. Some uncertainty must
inevitably obscure the origins and cloud the recollection of a man who
was only a boy when engulfed in the German attack on Poland in 1939,
and it is perhaps unnecessary to multiply the inconsistencies and doubts
which the Commission's inquiries have produced, since he is now an
American citizen. Manfred Kapp told the Commission1 that he was
born in Luneburg in Germany on December 17, 1928 and was taken
to France in 1933. He also entered the United States in 1947 and
worked at the Ace Typewriter Company until 1950 when he spent two
years in the United States Army. Kapp says that he first met Tramiel
when he was on leave from the army in New York in 1951. Tramiel says
that he first met Kapp in 1952 or 1953 when they were fellow-employees
at the Ace Typewriter Repair Company. Kapp, who was in the ordnance
department, acquired a knowledge of book-keeping in the army whereas
Tramiel either gained or improved his knowledge of typewriters in that
service.
Whatever may be the truth of this chronology — and it is dwelt
upon because the credibility of these two men must, in view of the
evidence they gave and the parts they played, be tested at every point —
it seems to be common ground that Tramiel and Kapp formed a partner-
ship for the sale of used and reconditioned typewriters in New York in
or before 1954, the first consignment of which according to Tramiel
was obtained from the United Nations Organization. With money
acquired from the sale of these machines they bought a business in the
Bronx called the Singer Typewriter Company from the premises of which
they sold new and used typewriters and in due course acquired a local
dealership for an adding machine called "Everest". Tramiel, who was
the "outside man" of the partnership, while on selling trips outside New
York visited Toronto where the wife he had married in Germany had
relatives. Here he found interest among dealers in the Everest machine
and returning to New York persuaded the manufacturer to give himself
and Kapp an exclusive Canadian dealership. By 1956 Tramiel had
moved his family to the Don Mills district of Toronto and had estab-
lished -Everest Office Machines Timiten at 2 Toronto Street on money
Evidence Volume 87.
107
% £\)e,r-est Oj^cj^ Klad^c Con^o^v Una '
Three Acquisitions
borrowed from his stepfather and mother in New York. To the stock-
in-trade of new adding machines were added used typewriters shipped
by one of the Singer Company's suppliers known as Type Sales Inc., and
after about a year of operation in Toronto, where Tramiel was assisted
by Kapp on week-end visits, the latter brought his family there in his
turn and threw in his lot completely with his partner's Canadian enter-
prise.
In the next two years Everest Office Machines handled the sales of
the adding machine and a line of new typewriters, and the used type-
writers were marketed by another firm known as Wholesale Typewriter
Company. Both of these enterprises were jointly owned by Jack
Tramiel and his wife, Helen, and Manfred Kapp and his wife, Estelle.
Quite soon the money invested by Tramiel's stepfather and mother, Mr.
and Mrs. Silberman, had to be reinforced by allowing Type Sales Inc.
to acquire an interest in the Toronto businesses which by 1958 were
showing signs of faltering. In the meantime Tramiel had been in England
and had there met one Markus, who was the agent for the Everest
machine in Great Britain. Since the Canadian market for used type-
writers of a kind not particularly well adapted to local needs was fading,
and the demand for new portable typewriters was not being readily met,
Tramiel was interested in Markus's suggestion that a manufacturer in
Czechoslovakia was engaged in exporting portable typewriters to this
country and had so far failed to find a reliable distributor. From this
conversation and with Markus's help the Czech machines began to come
in to the premises at 2 Toronto Street where a new company, incorpo-
rated on October 10, 1958 under the name of Commodore Portable
Typewriter Company Limited, had been brought into existence. The
holders of all its shares at this stage were Mr. and Mrs. Tramiel, Mr.
and Mrs. Kapp and Mr. and Mrs. Silberman.
The business of Commodore Portable Typewriter might well be
judged to have reached satisfactory proportions when substantial orders
for the Czech typewriter were placed by Toronto's two largest depart-
ment stores, the T. Eaton Co. Limited and the Robert Simpson Co.
Limited, known more familiarly to generations of Torontonians as
Eaton's and Simpson's. But shortage of working capital was a familiar
problem. The company had been financing its inventory by factoring
its accounts receivable with a lender by the name of Inter-Provincial
Commercial Discount Corporation Limited which was providing funds
at a cost of 2% per month against accounts payable in 90 days. To
obtain better terms and to enlarge the inventory the manufacturer must
be looked to, and he in turn looked to the Czechoslovakian State Bank
which required an acceptable guarantor of payment. Tramiel's story2
is that the guarantee of Inter-Provincial Discount was offered and
declined, and that at the suggestion of one Hall, editor of a magazine
*Evidence Volume 84.
108
Chapter V
known as "Canadian Office" in which Commodore Portable Typewriter
was advertising, he applied to Douglas R. Annett of Annett & Co. for
some assistance and a solution of the financing problem. At Annett's
office he also met Carman G. King, probably in February of 1959.
Tramiel, who conducted these negotiations by himself or with the assis-
tance of his solicitor, L. W. Spencer, was told that there was no possi-
bility of financing by an investment house or other institution, but that
if the arrangement with Inter-Provincial Discount was unsatisfactory,
Annett & Co. were prepared to introduce him to another finance com-
pany. Shortly afterwards, and again at the Annett office, Tramiel met
C. P. Morgan.
Annett & Co. Introduce C. P. Morgan
It will be remembered at this point that Morgan was fresh upon the
Toronto scene and eager to expand the enterprise which had recently
received impressive support from Lambert & Co. No one had been more
concerned with obtaining this than Carman King and he. in his evidence
given to the Commission on December 21, 19661, has testified to his
interest in the attractive terms upon which Inter-Provincial Discount
was lending to Commodore Portable Typewriter. Morgan expressed his
own interest in the factoring business as a new field for Atlantic Accep-
tance and agreed to form a company for the purpose of financing Com-
modore Portable Typewriter in this way; Atlantic would provide the
necessary guarantee required by the Czechoslovakian State Bank. This
decision was reached, according to Tramiel. after two days of discussion
and after Morgan had appeared at the Commodore premises with A. C.
Rooney for a tour of inspection and to look at the books. After this the
plan was elaborated to the extent of providing an interest of 25 Tr for
Commodore Portable Typewriter and 2Ac'c for Annett Partners Limited.
a participation suggested by Morgan according to Tramiel and by
Tramiel according to King. A meeting at the King and Bay Streets
branch of the Bank of Nova Scotia, attended by the manager of the
branch, Morgan, D. R. Annett, King, Tramiel, Kapp, L. W. Spencer
and Harry Wagman, then took place. To this Wagman was bidden by
a telephone call from Morgan and, if one is to believe Wagman's
evidence,2 merely to be told that the firm of Walton, Wagman & Co.
were to be auditors of a new company called Commodore Sales Accep-
tance Limited; other than to hear this intelligence he says he played no
part at the meeting. Both Walton and Wagman asserted that they had
only met Morgan at one previous occasion in Walton's office when, as
will be recalled, Morgan was representing the International Silver
Company in the bankruptcy of Associated Housewares Distributors, and
Walton said that he only knew of this appointment of their firm after
'Evidence Volume 93.
'Evidence Volume 82.
109
Three Acquisitions
the event from Wagman. They were later to admit that there were
probably other meetings prior to this. Tramiel says that he did not know
of this appointment of auditors until a month later; he also volunteered
the information that with an investment of $100,000 by its promoters
the new company was to get a line of credit of $300,000 from the bank,
and it is not unreasonable to suppose that this was the principal subject
of conversation at the Bank of Nova Scotia meeting. No doubt Morgan
did most of the talking, but difficulty in recalling what was said or done
on that occasion is characteristic of all of the evidence of the principal
actors in this transaction. In any event there was another meeting in
Morgan's office a day or two later attended by Morgan, Tramiel, Kapp
and Wagman. Wagman said that the main discussion here was about
the factoring of the accounts receivable of Commodore Portable Type-
writer which was to be the first customer of Commodore Sales Accep-
tance. He was to set up the books and thereafter work closely with
Manfred Kapp, but no reference was made to any reason why this
factoring could not be done directly by Atlantic Acceptance and why
it was necessary to set up a subsidiary company.
Incorporation and First Financing of Commodore Sales Acceptance
Although Commodore Sales Acceptance was incorporated as a
private company on March 4, 1959 with six shares being issued at a
price of $1 each to Morgan, D. R. Annett, Carman King, L. W. Spencer,
and two employees of the latter's law firm, Atlantic's acquisition of the
promised 5 1 % interest did not take place until May 20, at which time
3,996 shares were allotted for a total consideration of $400, 2,038
shares being allotted to Atlantic Acceptance Corporation and 1,958
shares to Annett & Co. The apparent shortage of four shares is due
to the allotment of two at 10^ to be held in trust for Atlantic by Morgan
and Spencer and two to D. R. Annett and Carman King to be held in
trust for Annett & Co., subsequently rescinded and cancelled by the
directors on August 24, 1960. This discrepancy, as well as an apparent
surplus of two incorporator's shares issued but not transferred, led to a
minor variance between the records of the company and its financial
statements as to the total number of shares issued, authorization by the
directors varying between 100,006 and 100,002 and the financial state-
ments showing a total of 100,000 shares; to note the irregularity as a
minor discrepancy only is probably sufficient. These shares were issued
in conjunction with an issue of promissory notes payable on demand in
the aggregate amount of $100,000 for which Atlantic Acceptance lent
$51,000 and Annett & Co. $49,000, so that the "package" amounted to
an issue of 40 common shares at 10^ per share for each $1,000 worth
of notes purchased. On July 22, 4,000 shares were issued at a price of
50£ per share in conjunction with the sale of a further $100,000 worth
of demand notes, 2,000 shares being subscribed for by Atlantic Accep-
110
Chapter V
tance with $50,000 worth of notes, 1,000 shares by Annett & Co. with
$25,000 worth of notes, 500 shares by Renel Investments Limited, a
company controlled by L. W. Spencer, with $12,500 worth of notes and
the same subscription and purchase by Sidney Fromer putting $102,000
into the company's treasury. The third issue of demand notes and shares
took place on October 13, and on this occasion 8,000 shares were issued
at $1 in conjunction with the sale of $200,000 worth of notes, Atlantic
Acceptance maintaining its position by taking 4,000 shares with $100,-
000 worth of notes but Annett & Co. only 1,000 shares with notes in
the amount of $25,000. The balance went to W. H. Wallace, John C.
Laidlaw, R. J. McCullagh and Mrs. G. C. McCullagh in amounts as to
shares and notes which are set out in the analysis of issues and transfers
of shares and notes shown at Table 24 * and Table 25.2 The result was
to put a further $208,000 into the treasury of Commodore Sales Accep-
tance.
Evidence of John C. Laidlaw
At the risk of digressing and because Mr. Laidlaw will be met with
again, it should be said that at this time he was the Toronto circulation
manager of Toronto's morning newspaper, The Globe and Mail. He gave
evidence on two occasions before the Commission to identify various
documents but it was in an examination under the Securities Act, con-
ducted by Mr. Cartwright on January 26, 1967,1 that he testified to his
association with C. P. Morgan whom he had first met when they were
next door neighbours in Burlington, Ontario. Laidlaw said that their
first association was in 1956, but it is reasonable to assume that it was
earlier because he refers to Morgan's departure for Niagara Falls "two
or three years" afterwards. The two families became very friendly and
later on, while the Laidlaws were still in Burlington, Morgan told him
about Commodore Sales Acceptance and asked him whether he was
interested in buying shares or notes. At first he declined but the sugges-
tion was renewed and may best be described in his own words:
"He also asked me whether I knew of any one else who might be
interested, with the understanding these would be transferred or ex-
changed into Atlantic shares at a later date. At that time, I forget the
exact amount I put in, I think I purchased the equivalent, when it was
transferred into Atlantic shares, about fourteen hundred shares on my
part."
Laidlaw's sister, Mrs. McCullagh and her son, R. J. McCullagh.
who had considerably more funds at their disposal, were also persuaded
to invest, and as a result of the substantial profit that they made Laidlaw
'Exhibit 3241.
■Exhibit 3242.
1Exhibit 4888.
Ill
Three Acquisitions
and the McCullaghs made a later investment in a Morgan enterprise
which was a total loss. In 1962 Laidlaw was induced to leave his posi-
tion with the newspaper and go to work for Morgan at Chartered
Management Consultants to act as a confidential investigator of bor-
rowers from Atlantic at a salary of $20,000 a year. Here he had a small
room, a "hole in the wall" as he said, in the offices of Walton, Wagman
& Co. in the Temple Building and began his career as a nominee director
and confidant of the president of Atlantic Acceptance. If his recol-
lection of a conversation with Morgan about the forthcoming conversion
of Commodore Sales shares and obligations into Atlantic stock is
accurate, his evidence in this respect illuminates an intricate transaction
from which disturbing inferences must be drawn. At this time Laidlaw
had absolute faith in Morgan's integrity and judgment, both from con-
viction and as a result of inquiries he was careful to make, and remained
in his employ until June of 1965.
Commodore Portable Typewriter's Interest in Commodore Sales
Acceptance
The issue of demand notes of October 13, 1959 was the last of that
order and a further digression may here be made to discover means by
which Commodore Portable Typewriter was allowed its promised 25%
interest in Commodore Sales Acceptance. Jack Tramiel maintained
under oath that his company had no money to invest in this way and
that he and Kapp had not sought any participation in the new venture,
but that everything was arranged by Annett & Co. and Morgan. In fact
Commodore Sales Acceptance lent Commodore Portable Typewriter
$65,000 at the very start of their association against the accounts receiv-
able of the latter company of which $25,000 was used to pay off Inter-
Provincial Discount Corporation. The sum of $8,000 was paid to Annett
& Co. in respect of a loan, $25,000 was lent back to Commodore Sales
Acceptance and the balance was retained by Commodore Portable Type-
writer, which also obtained a note from Commodore Sales Acceptance
to secure the loan thus made with the borrower's own money. The
money paid to Inter-Provincial Discount was on account of a liability
of Everest Office Machines to that company and, in consideration for
Commodore Portable Typewriter's contributing in this painless fashion
a quarter of the funds which bought the first issue of Commodore Sales
Acceptance notes, two of its shareholders, Helen Tramiel and Estelle
Kapp, were permitted through Annett & Co. to acquire 500 shares each,
or a quarter of the company's issued stock. Tramiel's evidence about
this transaction, which began three days of equivocation on a variety of
topics, progressed from the denial of any knowledge of the transaction
to a denial of any understanding of its purpose and may well be repro-
duced.1 It is important to remember that the ground to be covered had
'Evidence Volume 84, pp. 11327-32.
112
Chapter V
already been explored in a preliminary discussion between Mr. Shepherd
and the witness in the presence of the witness's counsel.
"MR. SHEPHERD: Do you consider it probable, Mr. Tramiel. that
you would forget whether — a company is established, Commodore Sales
Acceptance, requiring $100,000 to operate, and it lends twenty-five
thousand of those dollars to its principal borrower so that that borrower
may re-invest the money in Commodore Sales Acceptance? Would you
forget that? Would you forget whether or not that occurred?
A. The way you have said, Mr. Shepherd, it did not occur this way.
I don't remember of any exact money loaned to Commodore Portable
Typewriters for this purpose, investing in Commodore Sales Acceptance.
That did not occur the way you have just mentioned it to me for this
specific purpose.
Q. Well then, what did occur, Mr. Tramiel? Do you remember?
A. Mr. Shepherd, I am trying to answer you, the question to the best
of my knowledge —
Q. Yes—?
A. — it may be Mr. Kapp could give you an answer on this because
he was involved in the financial transactions after the company was set
up, maybe he has better knowledge of it than I do because he was
involved in it as far as how it was set up exactiy.
Q. Was it at the meeting with Mr. Annett and Mr. Morgan — and do
you say Mr. King too? — at which the discussion was held of the 51%,
24%, 25% ratio?
A. In Mr. — ?
Q. Annett's office?
A. Yes.
Q. And who asked you whether or not Commodore Portable Type-
writers wished to take a 25% interest?
A. That particular part I don't think I was asked. I was told This is
the way it is going to be set up'.
Q. Then did you make inquiry, or were you told, where the money was
going to come from for you to invest?
A. If I was asked, Mr. Shepherd?
Q. Or were you told?
A. No, I was not asked and I was not told.
Q. What did you say when you were told that Commodore Portable
Typewriters would advance 25% of the money, being $25,000?
A. I have agreed to it. that Commodore Portable Typewriter will invest
this $25,000.
113
Three Acquisitions
Q. Now, when you agreed to it to what source were you looking for
the money to invest?
A. Mr. Shepherd, we were borrowing moneys from previously, from
Interprovincial.
Q. Yes?
A. We had a certain amount of money in our bank account.
Q. Yes?
A. If the money was invested in Commodore Sales Acceptance, after
we have borrowed money from Commodore Sales Acceptance, definitely
the money came from Commodore Sales Acceptance. If it was before,
then it must have come from our bank account, but the money was
borrowed from Interprovincial.
Q. And is the position: Commodore Sales Acceptance, you say, may
have loaned the $25,000, or part thereof, to Commodore Portable
Typewriters to enable it to make this investment; but if that happened
you have forgotten about it?
A. No, I am not saying that if it made — I can't remember the whole
transaction, where the money came from — I don't —
Q. Did you not just say to me one moment ago it may have come from
Commodore Sales Acceptance, wholly or in part?
A. Mr. Shepherd, the way you have explained it to me, yes, it may
have come from Commodore Sales Acceptance.
Q. And if it did come from Commodore Sales Acceptance, wholly or
in part, you have forgotten about it? You are not able to tell us about it?
A. I am answering the question the way you have asked.
Q. Well, answer that one then, please?
A. If it came from Commodore?
Q. Yes?
A. If I would know it did, I wouldn't have forgotten, but I don't know
if it did. That is the reason why I don't remember.
Q. I see. It may have come from Commodore Sales Acceptance with-
out your knowledge. Is that the position?
A. Mr. Shepherd, not without my knowledge. I have answered you
before that I am not usually involved in the investing of the money,
exactly where it came from. There will be no problem at all, I believe,
for Mr. Kapp to answer you this question. If I could answer the ques-
tion, maybe even now I could help you, but there is no reason for me
to withhold information to you.
Q. Well, Mr. Tramiel, are you satisfied that at the time Commodore
Portable Typewriters invested $25,000 in the notes of Commodore Sales
Acceptance, you then knew what the source of the $25,000 was, whether
114
Chapter V
it was from Interprovincial Discount or from the bank account of
Portable Typewriters — ?
A. From the bank account, I am sure it is from the bank account.
Q. Oh, I am equally sure it is from the bank account. You wrote a
cheque, no doubt?
A. The office did, yes.
Q. Do you recall Commodore Portable Typewriters writing a cheque
to Commodore Sales Acceptance for $25,000?
A. I know that they received a cheque, Mr. Shepherd —
Q. You know who received a cheque?
A. Who received the cheque?
Q. Yes?
A. No, I don't know who received the cheque.
Q. No. You said, Mr. Tramiel, 'I know they received a cheque'?
A. No, that Commodore issued a cheque —
Q. Commodore Portable Typewriters?
A. Pardon me, yes. Commodore Portable Typewriters issued a cheque
for $25,000. I "have given the instructions to issue that cheque to the
office.
Q. It would be either to Annett or to Commodore Sales Acceptance,
I take it?
A. You see, you just remind me of something. I believe it was to
Annett and Company.
Q. Yes?
A. But it is quite a number of years, Mr. Shepherd, and I don't remem-
ber exactly.
Q. And you cannot assist us further, other than you have already, as to
where Commodore Portable Typewriters got that money to make the
cheque good?
A. Only in the way I have said it."
After further questioning and a recess in which the witness con-
ferred with his partner Kapp, the examination was resumed:2
"Q. What the company actually did. Commodore Sales Acceptance, that
company loaned $25,000 to Commodore Portable Typewriters and Com-
modore Portable Typewriters loaned the $25,000 back to Commodore
Sales Acceptance, which made up part of the $100,000 raised by Com-
modore Sales Acceptance? It that correct?
A. Yes.
'Evidence Volume 84, pp. 11347-50.
115
Three Acquisitions
Q. Now, I ask you again why did Mr. Morgan, under those circum-
stances where he was finding all the money, allow you and Mr. Kapp or
your families, to acquire a 25% interest in Commodore Sales Accep-
tance for $100?
A. Mr. Shepherd, it could have been, I say again, after knowing what
the future of Commodore Portable Typewriters would be, that I could
have asked Mr. Annett if I could make this investment.
Q. Yes?
A. But the exact details, even I don't — I don't recall, it could have been
because after discussion just now, it could have been that way, that
could be we asked, maybe I asked —
Q. And do you consider that you did ask Mr. Annett?
A. Yes.
Q. Then why would Mr. Annett agree to it then? You see, here is the
position, Mr. Tramiel: Atlantic Acceptance advances $51,000, actual
dollars for notes and it is allowed to subscribe at 10 cents per share in
5 1 % of the stock. Is that correct?
A. Yes.
Q. Annett, or for the moment let us say Annett, subscribed or loaned
to Commodore Sales Acceptance, $24,000 and are allowed to purchase
at 10 cents a share, 24% of the stock. Is that correct?
A. Yes.
Q. Now, Commodore Portable Typewriters lends $25,000 to Commo-
dore Sales Acceptance but obtains the money to do so by borrowing it
from Commodore Sales Acceptance, and in return for that, you and Mr.
Kapp, or your families, are allowed to subscribe at 10 cents a share for
25% of Commodore Sales Acceptance? Is that correct?
A. Yes.
Q. Do you agree that this was an extremely generous gesture on behalf
of Commodore Sales Acceptance towards you and Mr. Kapp?
A. Yes.
Q. Did Mr. Morgan or Mr. Annett assert why this benefit was being
conferred upon you?
A. Mr. Shepherd, to answer your questions, he, to me, the most impor-
tant thing at that time was to be able to get the financing for Commo-
dore Portable Typewriters.
Q. I appreciate that, Mr. Tramiel, but my question was directed to the
fact that you got more than financing for Commodore Portable Type-
writers, you got a 25% interest in Commodore Sales Acceptance on
terms more favourable than those afforded to the Annett Company or
116
Chapter V
Atlantic Acceptance; and my question was directed to why that oc-
curred?
A. We could — well, I said before, we could have asked if we could
participate. We dealt with Mr. Annett because I believed the loan was
made through Mr. Annett, but our investment was made through Annett
and Company, not directly to Commodore Sales Acceptance —
Q. Yes—?
A. — and why exactly we received it, I don't know.
Q. Well, is not your answer then you don't know why you received this
opportunity?
A. Right."
Tramiel also asserted that it was at this time that the common stock of
Commodore Portable Typewriter was turned over to Morgan to be held
by him in trust for Commodore Sales Acceptance as further security for
the repayment of this company's loans, and not in October 1960 in trust
for the owners of the shares as is recorded in the minutes of the former
company.
Further Financing of Commodore Sales Acceptance
Returning now to the financing of Commodore Sales Acceptance, a
memorandum1 to his partners and associates in Annett & Co. from
Carman King dated December 21, 1959 outlines the next development.
"Memorandum to: —
Messrs. D. R. Annett,
J. W. Annett,
T. A. W. Duncan,
E. J. Allman.
From:— C. G. King.
Re: Commodore Sales Acceptance Limited
Powell Morgan has called a directors meeting for 11.00 a.m. Wednes-
day, December 23rd to be held in his office to approve additional financ-
ing, the payment of the accrued interest on the outstanding 6% notes as
of December 31st, the splitting of the common shares (in effect 4 for 1)
and the declaration of a common share dividend as of December 30th,
of 100 per share on the new common.
The estimated profits for the year ending December 31st should
amount to around $25,000 after taxes and interest, or about 25$ per
share on the new common.
There are now outstanding 400,000 6% notes and 16,000 shares of
common. 4000 of the presently outstanding (old) shares are to be sold
"Exhibit 3246.
117
Three Acquisitions
to Atlantic Acceptance at $ 1 .00 per share to compensate them for man-
agement and the placing of future situations with Commodore. This
will result in there being outstanding 20,000 shares prior to the split.
Their line of credit with the Bank of Nova Scotia still stands at
$150,000.
The initial offering of 100,000 notes of the above at par carried 4000
shares of common at 10 cents, the second offering of 100,000 of the
above notes at par carried 4000 shares of common at 50 cents. The
third offering of 200,000 notes at par carried 8000 shares of common
at $1.00 per share.
It is also proposed to change the outstanding notes which presently
have no term into 5 year 6% notes due December 31st, 1964, to be
redeemable at par at any time prior to maturity at the call of the com-
pany.
The proposed additional financing is to consist of 100,000 6% notes
due December 31, 1964 at par and 10,000 shares of the new common
at $1.00 per share.
Providing payment is made for these new securities by December 28,
1959 the new common shares will participate in the 100 dividend which
will go ex dividend December 29, 1959.
c.c. Mr. C. Powell Morgan C. G. King"
The meeting was attended by the four directors of the company,
C. P. Morgan, D. R. Annett, L. W. Spencer, and C. G. King, and
resolved first that "subject to agreement by all parties concerned" all the
demand notes issued to date be altered as to their terms by making them
payable on December 31, 1964 but redeemable at par at any time at the
option of the directors, a provision which would have been of singular
disadvantage to the noteholders in any circumstances other than those
which ultimately developed. Secondly, the issue of 6,500 shares forth-
with as fully paid and non-assessable was authorized for services rend-
ered as follows:
125 shares to Carman G. King for arranging, financing and
administrative services.
125 shares to Douglas R. Annett for the same services.
1 25 shares to Louis W. Spencer for legal services.
250 shares to Manfred Kapp for public relations services.
1,000 shares to Harry Wagman for general office and accounting
services.
4,875 shares to Atlantic Acceptance Corporation Limited for
management and credit services.
Nevertheless these shares are shown in the books of the company as hav-
ing been paid for at $1 per share. Thirdly, all the shareholders of the
company were given the right to subscribe for three shares for each one
118
Chapter V
then held at a price of 10c per share. Fourthly, the offer of Annett &
Co. or its nominees to lend the company $100,000, repayable at par on
December 31, 1964, bearing interest at 6% per annum, and its subscrip-
tion for 10.000 shares at $1 per share were accepted. Fifthly, a dividend
of 10c per share to shareholders of record on December 28 was
approved and, sixthly, the borrowing of $200,000 with interest at 9%
per annum from Atlantic Acceptance was authorized. Finally the num-
ber of the company's directors was increased from four to seven.2
Some simplification of what appears in Table 24 should here be
attempted. Dealing with the issues of December 23, 1959, the first and
simplest is that of the 6,500 shares issued for services rendered but for
which $6,500 was apparently received by Commodore Sales Acceptance.
Then on the same date the recipients of these shares were issued three
shares for each one issued for services rendered at a price of 10C per
share, yielding $1,950. The remaining shareholders did not get the bene-
fit of this option until the date of its expiry on December 26, at which
time they were issued 48,000 shares at an aggregate price of $4,800.
One other transaction on December 23 must be noticed and that is the
subscription made by King on behalf of Annett & Co. for 10,000 shares
in respect of the $100,000 in term notes issued against the loan above
referred to. This issue was distributed as follows:
Notes Shares Total
British Mortgage &
Trust Company
$ 25,000.00
2,500 @ $1
$ 2,500.00
McConnell, Eastman
& Co. Ltd.
25,000.00
Prismac Limited
2,500 (a $1
2.500.00
Annett Partners
Limited
40,000.00
4,000 @ $1
4.000.00
C. G. King
10,000.00
1,000 @ $1
1.000.00
TOTAL
$100,000.00
10,000
$10,000.00
McConnell, Eastman & Company Limited and Prismac Limited
were closely associated in the person of James E. McConnell. as the split
allotment shows. A further service was performed by Annett & Co. at
C. P. Morgan's request and casts additional light on the beneficial
owners of shares ostensibly held by Annett & Co. In a letter dated
December 28, 1959, signed by Morgan on behalf of Commodore Sales
Acceptance Limited, Annett & Co. were asked to disburse dividends at
the rate of 10f* per share to the following shareholders in respect of the
•Exhibit 60.
119
Three Acquisitions
numbers of shares set forth after their names and a cheque for $10,000
was enclosed for the purpose:3
Annett&Co. et al 13,920
British Mortgage & Trust 1,920
Atlantic Acceptance Corporation 51,660
Phyllis McCullagh 3,360
Robert J. McCullagh 3,104
J. C. Laidlaw 1,536
Sidney Fromer 2,000
Renel Investments Limited 2,000
William H. Wallace 2,000
Van-Bur Ltd 2,000
L. W. Spencer 500
C.G.King 500
D. R. Annett 500
H. Wagman 2,000
Estelle Kapp 500
Helen Tramiel 500
British Mortgage & Trust 2,500
Carman G. King 1,000
Prismac Limited 2,500
Annett Partners Limited 2,000
Annett Partners Limited 2,000
H. Wagman 2,000
100,000
Annexed to the letter as found in the Annett files is a memorandum
showing the distribution of the 13,920 shares referred to opposite
"Annett & Co. et al". It is in longhand and it is as follows:
A. T. Christie — Annett Partners 3,072
T. A. W. Duncan 384
C. G. King 2,304
W. F.Hill 160
Annett & Co. Ltd. re Tramiel 4,000
Mrs. K. Christie — Annett Partners 2,400
Wilfred P. Gregory 1,600
13,920
There are some observations to be made about names appearing in
these lists. In the first place Helen Tramiel and Estelle Kapp appear as
owners of 500 shares each which, as the certificates indicate, must have
been Kapp's 1 ,000 shares acquired as to 250 for services rendered plus
750 at 10^ per share. The 4,000 shares recorded on the Annett memo-
randum as being held by "Annett & Co. Ltd. re Tramiel" were partially
dealt with on January 29, 1960 by a transfer of 3,000 to Mrs. Tramiel
and Mrs. Kapp in denominations of 1,500 each, the balance being re-
tained until February 1961 by Annett & Co. Neither A. T. Christie nor
•Exhibit 3247.
120
Chapter V
W. P. Gregory had yet become directors of Commodore Sales Accept-
ance and were not to do so until August 24, 1960. Gregory none the
less became a director of Atlantic Acceptance on April 10, 1959.
Christie would become one on March 17, 1960. At the end of the year
1959 Commodore Sales Acceptance had, according to its financial state-
ment, and ignoring the discrepancies which plagued successive meetings
of the board of directors, 100,000 common shares outstanding for
$33,650 and 6% unsecured notes due December 31, 1964, payable in
the amount of $500,000. It had accounts receivable from ten borrowers
in the amount of $742,400 of which $320,500 was owing by Commo-
dore Portable Typewriter (shown on the history of accounts receivable
at Table 11 under its subsequent name of Commodore Business Ma-
chines) and net income earned of roughly $22,400. Of the shares
Atlantic held 51,562, Morgan and Spencer holding an additional four
each in trust, and of the notes it had purchased $201,000 worth at par.
Thereafter no more shares are issued although numerous transfers
of ownership or registration take place, but on August 24, 1960 a sig-
nificant change occurs in the nature and number of the obligations of
Commodore Sales Acceptance. In establishing the time at which these
changes were contemplated a second memorandum in draft form by
Carman King, dated June 21, 1960, is of more than historical interest:4
"Memorandum: June 21, 1960.
From: — Mr. C. G. King
COMMODORE SALES ACCEPTANCE LIMITED
As at December 31, 1959 this 51% owned subsidiary of Atlantic
Acceptance Corporation Limited had outstanding 500,000 6% unse-
cured notes due December 31, 1964 and 100,000 shares of no par value
common.
After all charges and income taxes they showed a profit of $22,393.40
for the first 10 months of the company's operations, for the period
March 4, 1959 to December 31, 1959. This amounted to 22.390 per
share.
On December 31st the company paid the interest on the notes and a
dividend of 100 per share on the common. Currently the common is
$3.00 bid over-the-counter and the earnings after taxes and interest for
the first 5 months of 1960 are 170 per share.
It is now proposed to offer the unsecured note holders new 15-year
6% convertible notes dated July 1, 1960 due July 1, 1975. These notes
will be convertible at the rate of $5.00 per share for 14 years, com-
mencing July 1, 1961. The notes will be non callable until July 1,
1961 and then will be callable on 60 days' notice commencing at $108
and accrued interest and with the call price reducing half of one per-
cent per annum. Conversion will be allowed until the day of redemption.
'Exhibit 3248.
121
Three Acquisitions
The above suggested offer is subject to the approval of the Board of
Directors of Atlantic Acceptance Corporation Limited and of Commo-
dore Sales Acceptance Limited.
If this proposed offer is approved it has been suggested that the
Canada Trust Company, Toronto, become the Trustee for the new
convertible notes.
Coincident with the exchange offer to the old note holders an addi-
tional 500,000 of the 6% convertible notes will be offered to them for
cash at par and accrued interest. The notes available for cash subscrip-
tion will bear the same terms as the convertible notes offered in exchange
for the presently outstanding notes.
The company is opening a small factoring office in New York City
to handle some special business directed to it by one of its Canadian
customers.
The company has also applied for a change in name and while the
new convertible note interim certificates will bear the name of Com-
modore Sales Acceptance Limited it is hoped that the new name of
Atlantic Sales Acceptance Limited will be granted by the Ontario
authorities by the time definitive convertible notes are available.
It is presently planned that within a reasonable time after completion
of the above financing that application will be made to make the com-
pany a public one."
The first meeting of the board of Atlantic Acceptance where the
change in the financing of Commodore Sales Acceptance was mooted
was held on June 28. Here there was a statement by C. P. Morgan that
the board of directors of Commodore Sales Acceptance had approved
an issue of $1,000,000 of 15-year convertible debentures, a statement
which finds no confirmation in any minute of the directors of the latter
company who had not met since March. Two things were decided upon:
first, to exchange the present holding of $201,000 term notes and pur-
chase up to $400,000 of the new debentures; secondly to authorize the
chairman and the secretary to buy not more than 10,000 shares of Com-
modore Sales Acceptance from the existing shareholders at a price not
in excess of $4 per share. No doubt Atlantic's position would have been
precarious had it continued to hold only $201,000 of a total of $500,000
of notes issued once convertibility had been achieved. The approval of
the debenture issue announced by the president of Atlantic to his board
on June 28 was not sought by the president of Commodore Sales Accep-
tance from his board until August 24, and on that day two meetings of
the directors of the latter company took place. The first meeting was
devoted to the troublesome additional shares, since the company's solici-
tors had advised the board that they were not entitled to rescind an
issue, or be it said to enlarge the board of directors, without a special
resolution approved by a general meeting of the shareholders, and to
establishing a definitive list of the company's shareholders. The second
122
Chapter V
meeting held the same morning proceeded with the task of authorizing
the issue of $1,000,000 6% 15-year convertible debentures, of which
one-half would be exchanged for the outstanding term notes and the
remainder allotted for increased loans with the result illustrated in
Table 26.5 At the second meeting Christie, Gregory and Rooney be-
came directors and, since A. L. Beattie of Messrs. Osier, Hoskin & Har-
court is recorded as having attended both meetings, it is reasonable to
assume that the company's solicitors were now the same as those of
Atlantic Acceptance. L. W. Spencer in fact resigned as a director at this
point. Two additional items of business which were transacted at the
second meeting on August 24 should be noted. An amended resolu-
tion of a special general meeting of shareholders increasing the aggregate
maximum value for which shares might be issued from $750,000 to
$2,500,000 was presented to the meeting and a decision was taken to
apply for supplementary letters patent making Commodore Sales Accep-
tance a public company for submission to a subsequent shareholders'
meeting. This meeting eventually took place on September 27, being
attended by Morgan, Rooney and Laidlaw with Beattie also present.
Morgan held proxies for the Annett interests, the McCullaghs, Wagman,
Estelle Kapp, Christie, Gregory, British Mortgage & Trust Company and
Atlantic Acceptance Corporation. It approved the transactions of
August 24 and confirmed the directors special resolution No. 3 made in
relation to the change from private to public status. This is the last
heard of the proposal first broached in King's memorandum of June 2 1
and indeed it was the last meeting of shareholders concerned with other
than routine business. It will be seen that neither this proposal nor that
to increase the authorized share capital were necessary in the event.
Decision of Atlantic to Acquire the Minority Interest
As a result of the transactions of August 24 Atlantic Acceptance
had increased its holdings of Commodore Sales Acceptance obligations,
now convertible and a first charge upon the latter company's assets, from
$201,000 to $511,000. The additional loan of $310,000 gave it pro-
tection against convertibility such as it had formerly enjoyed by virtue
of its shareholdings. Annett Partners and Annett & Co. increased their
investment by $72,600; British Mortgage & Trust Co. by $37,000 to
$74,000; Carman King doubled his investment as did McConnell, East-
man & Co., and Laidlaw and the McCullaghs added to their holdings in
modest amounts. Only Renel Investments and Sidney Fromer and
William H. Wallace and Van Bur Limited, of the substantial registered
noteholders, failed to take advantage of the opportunity, although they
duly surrendered their term notes in exchange for the new debentures.
The position of Commodore Portable Typewriter, shrouded in the
obscurity of the Annett holdings, also remained unchanged.
'Exhibit 3244.
123
Three Acquisitions
A meeting of Atlantic directors took place in the executive offices
on November 17, 1960, consisting of Morgan, Christie, Gregory,
Rooney, Martin and Medland and, in the course of transacting a great
deal of business, a new direction was imparted to the company's policy
toward Commodore Sales Acceptance. The relevant section of the
minutes deserves to be quoted:1
"COMMODORE SALES ACCEPTANCE LIMITED
ACQUSITION OF MINORITY INTEREST
ACQUIS 1 1 IQW
The Chairman explained that the minority ownership of Commodore
Sales Acceptance Limited was 47.84% and represented 47,840 shares
of common stock which shareholders also owned $489,000 principal
amount of 6% convertible debentures. He further explained that in the
interests of future consolidated financial planning that it would be particu-
larly desirable for Atlantic Acceptance Corporation Limited to acquire
the entire interest of minority shareholders in the common shares and
also in the debentures. It was explained that the principal advantage of
so doing would be that the consolidated equity capital and net worth
of Atlantic Acceptance Corporation Limited would be materially in-
creased, thus, the consolidated credit base for future borrowings by
Atlantic Acceptance Corporation Limited would be correspondingly
proportionately increased.
After considerable discussion and upon motion duly made and sec-
onded and unanimously carried (Messrs. Christie and Gregory having
declared their interest refrained from voting) it was resolved as follows:
RESOLVED THAT:
The President and the Secretary are hereby authorized and em-
powered to submit an offer to the minority shareholders of Com-
modore Sales Acceptance Limited for the purpose of acquiring the
minority interest in the common stock of that Company and in the
debenture obligations of that Company held by individuals or cor-
porations other than Atlantic Acceptance Corporation Limited and
that the offer shall be to acquire such minority shares on the basis
of issuing three shares of the common stock of Atlantic Acceptance
Corporation Limited in exchange for eight shares of common stock
of Commodore Sales Acceptance Limited. In addition, the owners
of the Commodore Sales Acceptance Limited debentures, other than
Atlantic Acceptance Corporation Limited, shall be offered seventy-
five shares of common stock of Atlantic Acceptance Corporation
Limited in exchange for each $1,000 principal amount of Commo-
dore Sales Acceptance Limited debentures.
The President is hereby authorized and empowered in his sole dis-
cretion to determine the remaining general terms of the offer in-
cluding what proportion of acceptance by the offerees shall be
required as a condition precedent to the obligations of the Company
'Exhibit 19.
124
Chapter V
to complete the purchase and the date when such offer shall be
made and shall expire. This offer shall be subject, if necessary, to
any required shareholder approval and further, if necessary, to the
issuance of Supplementary Letters Patent to Atlantic Acceptance
Corporation Limited increasing the number of authorized common
shares of capital stock of the Company to provide sufficient treas-
ury shares to enable the Company to meet its obligations under
such offer."
First Stage of Acquisition — Payment of $6 per Share of Commodore
Sales Acceptance
The basis upon which Atlantic Acceptance acquired by stages all
of the shares of Commodore Sales Acceptance was thus fully set out six
months before the transaction was completed, and on February 6, 1961
the president was empowered to purchase for Atlantic as many shares as
he could from the minority shareholders at a price not to exceed $6 a
share; this may be compared with the $4 limit set by the directors on
August 24, 1960. Tramiel testified that it was as early as March 1960
when Morgan told him that he wanted to buy at $6 per share for Atlantic
the shares acquired by Helen Tramiel and Estelle Kapp. Tramiel's
explicit statement on oath to this effect is difficult to reconcile with his
expressed lack of knowledge of any of the other details of the transaction.
He said, however, that Morgan, a year before it actually took place, told
him that Atlantic wanted to make a substantial investment in Commo-
dore Sales Acceptance and wanted the Tramiel-Kapp shares for this
purpose. Both he and Kapp maintained that neither they nor their wives
ever had physical possession of any certificates and Tramiel seemed un-
able to distinguish between the shareholdings of the Commodore Portable
Typewriter group and the $25,000 notes-cum-debentures which rep-
resented the money loaned back to Commodore Sales Acceptance.
Kapp's evidence was more coherent on this point, he having taken
the trouble to look up the entries in the books of Commodore Portable
Typewriter which he had instructed the book-keeper to make. He in-
sisted, however, that he had no recollection of the 250 shares which had
been allotted to him for services rendered and for the further subscrip-
tion of three shares for one at 10^ per share. He admitted that he had
performed no public relations services for Commodore Sales Acceptance
and could not explain his signature as a subscriber for shares in the
minutes of that company.1 The fact that Kapp's name does not appear
as a shareholder in the definitive list established and approved by the
directors at the meeting of August 24, 1960 is explained by the earlier
issue of his shares to Mrs. Kapp and Mrs. Tramiel. Tramiel and Kapp
asserted that these transactions were performed and the share certifi-
cates were retained in the offices of Annett & Co., and it is possible that
'Exhibit 60.
125
Three Acquisitions
the two promoters of Commodore Portable Typewriter knew as little
about it as they now maintain. In any event they did not reap the ulti-
mate reward.
Mr. B. W. McLoughlin of Touche, Ross, Bailey & Smart found in
the files of Atlantic Acceptance a handwritten schedule of the stock
acquired by the company at $6 per share which he offered in evidence2
and is reflected on Table 27.3 This lists a total of 18,318 shares
acquired for an aggregate amount of $109,908. Van-Bur Ltd. and
William H. Wallace each sold 2,000 shares registered in their name in
April, 1961; Annett Partners Limited are shown as having sold 3,072
shares in March registered in the name of Calder & Co., a street name
used by the Bank of Nova Scotia Agency in New York and adopted by
Alan Christie with a view to making the shares more readily acceptable
as collateral; Annett Partners Limited again in the amount of 4,710
shares, registered in the name of Calder & Co. and various employees of
the Annett firm including King, which were identified as Christie's to
the number of 310 and Mrs. Christie's in that of 4,400; Laidlaw's 1,536
shares were acquired on February 27; and Netherlands Overseas Cor-
poration of Canada Limited sold 5,000 shares to Atlantic on February
16. The last group was registered in the name of Annett & Co. in respect
of 1,000 shares, and of Estelle Kapp and Helen Tramiel in denomina-
tions of 125, 375 and 1,500 shares each. Netherlands Overseas Cor-
poration was acting, as it turned out, as C. P. Morgan's broker and, on
February 17, J. R. Shemilt of that firm wrote a letter to Morgan4
acknowledging receipt of the seven certificates registered accordingly.
Morgan now had in his hands not only the 4,000 shares of Mrs. Tramiel
and Mrs. Kapp but an additional 1,000 shares registered in the name
of Annett & Co.
Second Stage: Exchange of Atlantic Shares for Commodore Sales Shares
and Debentures
The Atlantic directors on April 27 allotted 47,745 shares to the
completion of the acquisition of the -shares- of debentujxir held by the
minority group, in accordance with the plan of November 1 7 of the pre-
vious year. The minutes record that Christie, Gregory, Wallace and
Medland declared their interest in the transaction and refrained from
voting. It is now established that Medland refrained from voting for
the reason that he did not approve of the course taken, pointing out that
he had been offered shares of Commodore Sales Acceptance quite
recently at a lower price than $7.50 which was the result of the con-
templated exchange. Christie said that this was impossible and Med-
2Exhibit 3249.
"Part Exhibit 574.
♦Exhibit 3275.
126
Chapter V
land, who had been offered the stock by King, did not press the matter,
and indeed in his evidence to the Commission attributed his refusal to
vote to the reflection that "these fellows were making a good thing out
of it". At the time of this meeting Atlantic stock was selling at its high
for 1961 of $22 per share, whereas in 1960 it had sold no higher than
$16.50. No declaration of interest or disclosure of the arrangement
with Tramiel and Kapp were recorded as having been made by Morgan.
Two further schedules of the same nature as that dealing with the
sale to Atlantic of shares of Commodore Sales Acceptance at $6, written
in the same hand, were discovered in Atlantic's files and produced by
McLoughlin. Their combined effect may be observed on Table 27. The
first deals with the exchange of eight shares of Commodore Sales Accept-
ance common stock for three shares of Atlantic. British Mortgage &
Trust Company exchanged 12,420 of the former for 4,657 of the latter,
including the 4,000 shares purchased from Fromer and Renel Investments
on June 30, 1960 at a price of $4.05 each and 4,000 shares acquired
from Harry Wagman on September 20, 1960 at $4.75. R. J. McCullagh
received 1,164 Atlantic shares for 3,104 of Commodore Sales Accept-
ance, Mrs. McCullagh 1,260 for 3,360, Prismac Limited 937 for 2.500
and Annett Partners Limited 3,052 for 8,140.1 Instructions to issue
the appropriate number of shares of Atlantic Acceptance were given to
the Chartered Trust Company under seal and over the signatures of
C. P. Morgan and B. L. McFadden on May 11. The second list2 sets
out details of the transaction whereby the holders of Commodore Sales
debentures received 75 shares of Atlantic common stock for each SI. 000
of debentures held. For $99,000 of debentures British Mortgage & Trust
received 7,425 shares; Van-Bur Ltd. and William H. Wallace re-
ceived 937 and 938 shares respectively; J. C. Laidlaw received 1.095.
Mrs. McCullagh 2,325, Robert J. McCullagh 2,205. George W. Mc-
Cullagh 375, Netherlands Overseas Corporation 2,625. Trustees of the
Eaton Retirement Annuity Plan 3,750, James E. McConnell 3.750 and
Annett Partners Limited 11,250 shares. The schedule shows that in the
case of Netherlands Overseas Corporation the debenture certificates
registered in the name of Annett Partners add up to S25.000 only, and
an additional $10,000 required to make up the total of S3 5. 000 worth
of debentures attributable to Netherlands Overseas Corporation must be
looked for among the certiticates listed under the name of Annett Part-
ners Limited. The certificate in question is No. 50 and. when in-
cluded in the amount of debentures offered by Annett Partners,
produces a total of $160,000 and is thus recorded although the sum
attributable to the 11,250 shares received by Annett Partners was
$150,000. This odd juxtaposition of figures would not be remarkable
'Exhibit 3255.
'Exhibit 3257.
127
Three Acquisitions
were it not apparent that C. P. Morgan's account at Netherlands Over-
seas Corporation had been credited with $35,000 worth of debentures.
A total of $489,000 of debentures accordingly produced 36,675
shares which Atlantic caused to be issued by the Chartered Trust Com-
pany for those entitled to them as listed above. The 11,250 shares
issued to Annett Partners were dealt with more circumspectly. For
reasons which are not clear, but which strongly imply concealment, these
shares were directed by Atlantic to be issued in five certificates represent-
ing 4,950, 2,385, 2,025, 1,800 and 90 shares. These awkwardly-
contrived denominations were then credited to accounts of A. T.
Christie in respect of 1,440 shares, Kathleen Christie 4,125 shares,
C. G. King 4,035 shares, G. W. Ford 150 shares and W. P. Gregory
1,500 shares.
The Role of Netherlands Overseas Corporation Canada Limited:
J. R. Shemilt
The activities of Netherlands Overseas Corporation must again be
referred to. On the day of his acknowledgment of receipt of 5,000
shares of Commodore Sales Acceptance stock, February 17, 1961,
Shemilt apparently wrote another letter to C. P. Morgan.1 It reads as
follows:
"We hand you herewith certificates No. CD46, CD47, and CD55,
totalling $25,000.00 par value Commodore Sales Acceptance Limited
6% Convertible Debentures, due August 15th, 1975, fully registered in
the name of Annett Partners Limited with power of attorney attached.
Payment for these debentures in the amount of $25,100.00 has been
debited to your account with us.
We would appreciate it if you would sign the enclosed copy of this
letter and return it to us as a receipt for our files."
At the foot of the letter is the legend, "Certificates Received February
17, '61", with the signature of C. P. Morgan inscribed. The other rec-
ords for Morgan's account at Netherlands Overseas cast considerable
doubt upon the ingenuousness of this document. An entry on the ledger
card2 for May 8 shows the account being credited with the proceeds of
2,625 shares of Atlantic Acceptance in the amount of $56,142.50 of
which $52,500 would be attributable to $35,000 in debentures under
the terms of the exchange. Advice slips of the firm3 indicate that Mor-
gan's account was credited on April 25 in terms of the following note:
"$35,000 par value Commodore Sales Acceptance Limited. 6% De-
bentures, due August 15, 1975 registered in the name of Annett Part-
ners Limited, and endorsed in blank. To be converted into 2,625 shares
Atlantic Acceptance Corporation Limited, common shares."
'Exhibit 3274.
"Exhibit 3271.
'Exhibit 3276.
128
Chapter V
then on May 10 with:
"Interest of Commodore Sales Acceptance Ltd. 6% Convertible De-
bentures due August 15, 1975— February 15th to April 17th, 1961 —
$350.00."
The same records show that the 5,000 shares of Commodore Sales
Acceptance referred to in Mr. Shemilt's other letter of February 17 as
being received from Morgan and being registered in the names of
Annett & Co. and Helen Tramiel and Estelle Kapp were sold according
to contracts S-482 and S-483, both dated February 10 for settlement
February 15, in two lots, one of 3,000 shares and the other of 2,000
shares, described as "over the counter", a meaningless division since
Atlantic Acceptance was buying the whole 5,000 unless confusion of
the identity of the transaction was being deliberately sought. Contract
P-502, also dated February 10, announces the purchase of $25,000
worth of Commodore Sales Acceptance debentures, but there is no
similar document referring to the additional $10,000 of debentures with
which Morgan's account was credited.
Examination of this transaction may be briefly concluded by say-
ing that C. P. Morgan, the holder of only four shares of Commodore
Sales stock expressed to be held in trust for Atlantic Acceptance, re-
ceived a total of $72,500, less brokerage, for the sale of 5,000 shares to
Atlantic at $6 per share and for the conversion of $35,000 worth of
Commodore Sales Acceptance debentures to Atlantic stock by transfer
on the basis of 75 common shares of Atlantic for each $1,000 of deben-
tures, based upon a valuation of Atlantic shares at $20. Only 25,000
of the debentures are traceable to Commodore Portable Typewriter but
all the shares may be attributed to the principals of that company. On
the advice of Morgan, perhaps transmitted in part by Harry Wagman,
journal entries, and only journal entries, were made in the books of
Commodore Portable Typewriter4 showing a reduction of that com-
pany's debt to Atlantic Acceptance and Commodore Sales Acceptance.
This was realized ( 1 ) by a cheque of Netherlands Overseas Corporation
to Commodore Portable Typewriter in the amount of $24,992.50 dated
February 17, deposited in the payee's special account with Commodore
Sales Acceptance,5 and (2) by recording the payment of a debt of
Commodore Portable Typewriter to Commodore Sales Acceptance by
Mrs. Tramiel and Mrs. Kapp in the amount of $25,000 for which in due
course they received preference shares of the former. The journal entries
do not reflect the payment by Netherlands Overseas Corporation into the
special account and Kapp, in his evidence to the Commission, disclaimed
any knowledge of this, pointing out that the deposit stamp on the back of
'Exhibit 2131.
'Exhibit 3640.
129
Three Acquisitions
the cheque was not the same as that used by Commodore Portable Type-
writer, a fact which was evident from comparison of the exhibits.6 The
special account referred to was a commonplace of the factoring pro-
cedure adopted by Commodore Sales Acceptance and enabled payments
for accounts receivable to be made by cheque to Commodore Portable
Typewriter and then removed by transfer to the general account of
Commodore Sales Acceptance, without the maker of the cheque being
aware that the recipient of the funds was actually the factoring company.
The use of a different deposit stamp for the special account is thus
explained as a face-saving device to relieve the trading creditor from any
stigma that might attach to discovery by its debtors that it was involved
in what Morgan referred to as "secondary banking".
Summary of Acquisition by Atlantic of Minority Interest in Commodore
Sales Acceptance
The whole transaction, which has been dwelt upon at some length
because of the large expenditure of Atlantic money and the close asso-
ciation with the company of many persons who made substantial and
questionable profits out of it, may be conveniently summarized as
follows:1
Commodore Sales Acceptance Limited incorporated March 4, 1959.
On March 6, 1959 6 shares were issued to incorporating shareholders
according to the minutes. Between May 20, 1959 and December 26,
1959 an additional 99,996 shares were issued. This must have been
slightly in error because the financial records of the company subse-
quently show two less shares issued than the 100,002 share issue indi-
cated by the minutes of directors meetings. These shares were issued
at prices of 100, 500 and $1.00 per share.
Commodore Sales Acceptance received the following amounts:
For issue of Debentures $1,000,000.00
For issue of 100,000 common shares 33,650.00
$1,033,650.00
Atlantic Acceptance paid the following amounts
into the treasury of Commodore Sales Acceptance
For the purchase of Debentures $5 1 1 ,000.00
For the purchase of Common
Shares 15,953.50
526,953.50
The balance of debentures and shares purchased
by minority interests for $ 506,696.50
•Exhibit 3641.
'Exhibit 576.
130
Chapter V
Atlantic Acceptance purchased the entire minority
interest in the following manner:
Between January 1, 1961 and May 15, 1961
18,318 shares acquired for cash at $6.00
per share $ 109,908.00
29.524 shares acquired for 11,070 shares
of Atlantic Acceptance valued at $20 per
share which is equivalent to a price
of $7.50 per Commodore Sales share 221 ,400.00
$489,000 6% Convertible Debentures
exchanged on the basis of 75 Atlantic
Acceptance shares for each $1,000
debenture 733,500.00
Total consideration paid by Atlantic Acceptance
for shares and debentures held by minority
interest $1,064,808.00
Net cost of shares to minority interest 506,696.50
Profit realized by minority interest during
the two-year period $ 558,111.50
The last annual statement of Commodore Sales Acceptance which
would have been available to shareholders of Atlantic Acceptance, or
any one else at the time when this strenuous effort was made to acquire
the interest of the minority shareholders, would have been that for
December 31, 1960. Accounts receivable, less holdbacks and unearned
interest, amounted to $2,035,451 due from 21 borrowers, with $207,000
owing by Aurora Leasing Corporation, $111,644 by American-Marsh
Pumps (Canada) Limited, $388,200 by Pro Musica Limited, $789,270
by Commodore Portable Typewriter Limited, $42,630 by Calcutta
Holdings Limited, $117,704 by Canada Motor Products Limited, and
$189,475 by Canadian Nevil Enterprises Limited, to name only the
larger loans made to unknown companies which, had they inquired,
should have caused concern to the Atlantic directors. The net income
earned was $45,203 and the book value of the common stock was 89r
per share. Although a dividend of 10c per share had been paid in 1959
none was paid in 1960.
Profit and Complicity of the Directors and Others
The effect of exchanging three shares of Atlantic Acceptance at a
valuation of $20 per share (not unjustified at the prevailing market
price) for eight shares of Commodore Sales Acceptance was to create
an artificial value for the latter of $7.50. Since the holders of Commo-
dore Sales Acceptance debentures received 75 shares of Atlantic stock
for each $1,000 of debentures held, the effect was to increase the value
131
Three Acquisitions
of the debentures by 50% over what was expressed on their face. The
creation of debentures with their valuable privilege of conversion, even
though suspended until August 15, 1961, and their substitution for term
notes°due on December 31, 1964 was the excuse for the holders of the
minority interest in Commodore Sales Acceptance selling out to Atlantic
on highly advantageous terms, but it was an excuse provided by a board
of directors the majority of which were directors of the purchasing com-
pany. Of these, the position and the responsibility of C. P. Morgan
were pre-eminent. On the assumption that Atlantic Acceptance and
Commodore Sales Acceptance received the full benefit of the reduction
in indebtedness by Commodore Portable Typewriter referred to above,
the cost to him of his participation was $50,000. At a valuation of $20
each for Atlantic shares his $35,000 worth of debentures was worth
$52,500 and the proceeds of the sale of 5,000 shares of Commodore
Sale's Acceptance to Atlantic at $6 amounted to $30,000. We have seen,
however, that he sold through Netherlands Overseas Corporation the
2 625 shares of Atlantic received in exchange for $35,000 of debentures
above the $20 valuation for $56,142.50. He had, as it were, accounted
to Commodore Portable Typewriter for $25,000 in debentures and
$25,000 in shares and he realized $56,142.50 in respect of the deben-
tures and $30,000 in respect of the shares which found their way into
his account at Netherlands Overseas Corporation. There is no record
of his having paid anything for the additional $10,000 debenture so
carefully omitted from the correspondence and trading records of
Netherlands Overseas Corporation or for the additional 1,000 shares
apparently held by Annett & Co. for Tramiel and Kapp. His profit,
assuming that the additional $10,000 debenture and $1,000 in shares
were gifts from Annett & Co. and Tramiel and Kapp respectively, was
$36,142.50. Assuming the most in his favour and the existence of
records of payment not available to the Commission, it could not have
been less than $26,142.50. It is a matter of only passing but ironic
interest that Morgan rebuked Robert McCullagh for selling his and
his family's Atlantic shares acquired on this occasion at a price which,
according to Laidlaw, was about $24 a share.
While all the minority shareholders made a profit out of the shares
and debentures of Commodore Sales Acceptance, it is only necessary to
mention the names of those who, by virtue of their position or function,
should not have done so, particularly at the expense of the company of
which they were directors and to which their obligation was fiduciary.
Their profits, notional or actual, have been estimated on the basis of
one share of Atlantic common stock being worth $20. Alan Christie
pointed out in his evidence that he had acquired on the advice of
Carman King his position in Commodore Sales Acceptance before he
became a director of Atlantic; nevertheless he became one on March
132
Chapter V
17, 1960 and was elected a director of Commodore Sales Acceptance,
in which Atlantic maintained a controlling interest, on August 24, 1960.
He exchanged $19,200 worth of debentures and sold for cash, on March
8, 1961, 3,382 shares of Commodore Sales Acceptance for proceeds
which exceeded cost by $27,570.60. For his shares he received only $6
each. He said that the sale as early as March 7 was probably due to his
uneasiness at the large profits being made under the circumstances which
had been adumbrated and approved on November 17, 1960. His wife,
Kathleen Christie, for whose financial transactions he accepted responsi-
bility, made a profit on this basis of $57,420. Wilfrid P. Gregory, Q.C.
president of British Mortgage & Trust Company a director of Atlantic
since April 10, 1959 and a director of Commodore Sales Acceptance
since August 24, 1960, made a profit of $21,480, none the less a profit
because he did not sell his Atlantic shares.1 Gregory's company, which
exchanged its $99,000 of debentures for $148,500 worth of Atlantic
stock, had acquired since November 9, 1959, 12,420 shares of Com-
modore Sales Acceptance, 4,000 of them being from Harry Wagman,
at a cost of $39,844 and made a profit of $102,796. For an Ontario
trust company of venerable aspect and unblemished reputation to make
an investment of this magnitude in a private company making loans at
substantial risk was remarkable enough; to make it in a minority interest
of a private company which was absolutely controlled by another is, on
the face of it, such an act of folly as can only be explained, though not
justified, by prior and certain knowledge of a forthcoming profit. Those
who were not directors of Atlantic but, as directors of Commodore Sales
Acceptance and intimates of Morgan, Christie and Gregory, profited from
the transaction, are scarcely less culpable. Of these Carman G. King
played a leading part. He was the principal Annett partner involved in
the affairs of Commodore Sales Acceptance from start to finish, and it
was in his office that all, or nearly all of the transactions in notes,
debentures and shares took place. He had, however, no obligation to
Atlantic Acceptance and, were it not for the fact that without the
assistance of Annett & Co. what was done could not have been done on
the scale or with the degree of concealment achieved, he might only be
regarded as abnormally acquisitive. The excess of his proceeds over
costs of sale was $59,882.10, but he testified that he, Christie and
Gregory sold their shares at $22 and borrowed 5,000 shares from British
Mortgage & Trust by buying and reselling them after 15 days in a
manner which will be referred to again.
The position of others who profited was of a different order. Laid-
law, a director of Commodore Sales Acceptance, and an associate and
employee of C. P. Morgan, made $16,016.80. Harry Wagman, C.A.,
auditor and indeed book-keeper of Commodore Sales Acceptance, made
'Exhibit 3266.
133
Three Acquisitions
$17,700 out of a sale of 4,000 shares to British Mortgage & Trust
Company which grossed $ 1 9,000. Tramiel and Kapp, who had no duty
to Atlantic and were perhaps unwitting contributors to Morgan's
improper gains, recovered their company's investment and not less than
$23,875 and perhaps as much as $25,000 in profit. William H. Wallace,
a director of Atlantic since April 10, 1959 but not a director of Commo-
dore Sales Acceptance until May 15, 1961, made a profit of $17,600.
A. C. Rooney had no pecuniary interest in Commodore Sales Accep-
tance but he was a director of both companies at the material time and
knowledge of what was going forward must be attributed to him. D. R.
Annett made a profit in his own name on the basis of the $20 valuation
for Atlantic shares of $3,600 but no attempt is here made to analyze
the substantial profit made by the Annett firm in which King and Annett
must have participated, since it would include the tedious and perhaps
irrelevant examination of the clients' ledgers to show what was made
not only on the debenture conversion and share transfer in the final
stages but in the sale to customers of shares acquired at 10^, 50^ and $1
per share in 1959. For example Christie, who brought his records of
trading with him when he testified before the Commission, bought
$14,000 in notes at par and 560 shares at 50^ per share on King's
recommendation in July of 1959 and these shares, according to the share
transfer records,2 were part of the 1,958 acquired by Annett & Co. in
May for 10^. Of the shares offered to Atlantic by Annett & Co. in 1961
at $6 per share, only Christie's were involved.
Explanation to the Income Tax Authorities
A formal comment on the efforts of Atlantic Acceptance to acquire
complete control of the subsidiary company, which its president and
his friends had created and fostered with continuous infusions of Atlantic
funds, was given to the Taxation Division of the Department of National
Revenue in a letter dated April 1, 1963.1 It was signed for Atlantic
Acceptance by Davidson as secretary-treasurer after being re-drafted
by Messrs, Osier, Hoskin & Harcourt. In fairness the text, at least,
should be quoted in full:
"In your letter of February 21, 1963, you requested certain informa-
tion in connection with the acquisition by this Company of securities of
Commodore Sales Acceptance Limited ('Commodore').
Attached is a list of the persons from whom Atlantic Acceptance
Corporation Limited ('Atlantic') acquired the minority interest in the
common stock of Commodore during 1961 (Exhibit 'A'), and also a
list of the persons from whom Atlantic acquired $489,000. principal
amount of Commodore debentures during 1961 (Exhibit 'B').
'Exhibit 62.
Exhibit 3283.
134
Chapter V
As of December 31, 1960, Atlantic owned 52.158% of the outstand-
ing shares of Commodore and 51.10% of the outstanding 6% convert-
ible debentures of Commodore.
Atlantic decided that it was in the best interests of both Atlantic and
Commodore to have Atlantic acquire the shares and debentures held by
the minority shareholders and debentureholders.
You will see from the attached Exhibit 'A' that Atlantic acquired
18,318 shares of Common stock from minority shareholders of Com-
modore for cash at $6.00 per share. This occurred early in 1961. The
remainder, namely, 29,524 shares of Commodore common stock were
acquired thereafter on the basis of three (3) common shares of Atlantic
for eight (8) shares of Commodore.
You are referred to Exhibit 'B' which shows that the entire principal
amount of Commodore debentures held by individuals other than Atlan-
tic, i.e. $489,000 were acquired by Atlantic on the basis of seventy-
five (75) common shares of Atlantic for each $1,000.00 principal
amount of Commodore debentures.
It should be noted that the debentures in question were convertible
into common stock of Commodore at $5.00 per share, and that the
right to convert accrued to the debentureholders on and after August
15, 1961.
It became apparent to Atlantic early in 1961 that if Atlantic hoped
to acquire the minority interest in the Commodore shares, that the im-
minence of the right of the debentureholders to convert necessitated the
acquisition not only of the common stock, but also the debentures and
that consideration in excess of $6.00 per share would have to be offered
since only 18,318 shares out of a total minority interest of 47,842 shares
had been acquired at $6.00 per share.
In view of this, and in an attempt to acquire all of the outstanding
debentures in the mutual interests of both Atlantic and Commodore, a
conversion price was set by the directors of Atlantic at $7.50 per share
which was a fair and reasonable valuation of the Commodore shares
under the circumstance.
The value of the Atlantic common stock per share at the time of
conversion, as quoted by the Toronto Stock Exchange for approximately
one month prior to the date of acquisition of the Commodore shares
and debentures in exchange for Atlantic common stock, was $20.00 to
$22.00 per share.
The directors established the price of $20.00 per share as the fair
and reasonable value of the Atlantic common stock issued on conver-
sion, hence, on this basis, the conversion value of the common stock at
the rate of three (3) shares of Atlantic common for eight (8) shares of
Commodore common, was $7.50 a share for the common stock of
Commodore.
On or after August 15, 1961, the debentureholders, under the terms
of the debentures, could have converted each $1,000.00 of debentures
into 200 shares of Commodore common stock, thus, if the fair and rea-
sonable value of the Commodore common stock was $7.50 per share, it
135
Three Acquisitions
followed that the fair and reasonable value of each $1,000.00 principal
amount of Commodore debentures was $1,500.00.
At the time of the acquisition of the shares and debentures of Com-
modore by Atlantic, the shareholders and debentureholders (other than
Atlantic) consisted largely of people to whom an investment in Com-
modore had been recommended by Annett & Company Limited of
Toronto, Ontario. When Atlantic decided to attempt to acquire the out-
standing shares and debentures of Commodore, not owned by Atlantic,
Atlantic negotiated the terms of the acquisition, first on a cash basis,
and later on the basis of an exchange of common stock of Atlantic,
with Annett & Company Limited, whose recommendation was subse-
quently accepted by the investors in Commodore.
It should be emphasized that since Atlantic is a public Company
whose common shares are listed on the Toronto Stock Exchange, the
directors of Atlantic felt they had a duty to establish a fair value for
the Atlantic shares and also to be satisfied that the values were fair
and reasonable. In like manner, Annett & Company Limited had a
similar responsibility to their clients in recommending the values on
which the transaction should be completed.
In your letter of February 21, 1963, you refer to a 'premium' paid
by Atlantic on acquisition of debentures. This is not an accurate ex-
pression having regard to the facts of the situation. The price paid for
the debentures as previously stated was materially influenced by the
conversion privileges attaching to the debentures which materially added
to the value of these debentures and by the fact that Atlantic found it
impossible to acquire the common shares in sufficient quantity into
which the debentures could be converted at a cash offering price of
$6.00 per share. As previously stated, the price paid for the debentures
was, in fact, what was considered by Atlantic to be the fair value of
the debentures under the circumstances.
We consider, and we believe that the persons from whom we pur-
chased shares and debentures of Commodore believed, that the values
determined as set forth above, were fair market values for the securities
involved in the exchange.
Certain other factors which were particularly material influenced the
decision of Atlantic in this matter.
Commodore was incorporated on March 4, 1959. The original plan
was to keep the equity capital at a minimum and for the shareholders
to provide additional funds in a ratio equal to their stock ownership.
During 1959, the shareholders subscribed for $500,000 of 6% notes,
due December 31, 1964, however, additional funds were required and
Atlantic alone provided an additional $100,000 evidenced by a demand
promissory note.
During the year 1960, the original $500,00 of promissory notes
referred to above, were exchanged for 6% convertible debentures due
August 15, 1975, and a further $500,000 of debentures were issued
to the shareholders, thus, at the end of 1960, $1,000,000 principal
amount of such debentures were outstanding and owned substantially
136
Chapter V
by the shareholders in proportion to their holdings of capital stock of
Commodore. During 1960, however, Commodore required additional
funds which, unfortunately, were not available from the minority share-
holders and Atlantic found itself in the position of having to supply an
additional $600,000 of funds without assistance from any of the minority
shareholders.
It became increasingly apparent that the minority shareholders were
either unable or unwilling to provide funds in sufficient quantity to
enable Commodore to enjoy its full profit potential. This condition,
perhaps more than any single element, precipitated the plan instigated
by Atlantic to acquire the minority interest in Commodore.
The facts are, that up until the end of 1960, the minority share-
holders were trading on the equity of the demand loans made by Atlantic
to Commodore which, as stated above at December 31, 1960, aggre-
gated $700,000. Atlantic could no longer continue to be philanthropic
in the interests of the minority shareholders. Unfortunately, the minority
shareholders, either by design or from necessity, were unable or un-
willing to contribute their proportionate share of capital required for
the further expansion of Commodore. They were well aware of the
profit potential and were also aware of the decision of Atlantic to form
a wholly owned subsidiary company of Commodore to operate in the
same line of business in the U.S.A. but were uncooperative in provid-
ing their share of the means to develop this potential.
Obviously under those circumstances, the minority shareholders and
convertible debentureholders of Commodore assessed the value of their
interest in Commodore on three elements, namely, past earnings, profit
potential and a nuisance value.
The soundness of the planning by Atlantic and the reasonableness
of the consideration paid can be best illustrated by the fact that after
Atlantic acquired the interest of the minority shareholders in the stock
and debentures of Commodore, the investment of Atlantic in demand
notes of Commodore increased from $700,000 at December 31, 1960
to $5,485,960 at December 31, 1961, and to $13,200,000 at December
31, 1962. Atlantic is convinced that the previous minority shareholders
would not, or could not have provided their share of the funds in this
amount required to develop Commodore and consequently, the profit
potential of Commodore would have been dissipated had Atlantic failed
to acquire the interests in the minority shareholders.
The negotiations by Atlantic with the minority shareholders were defi-
nitely at arms length. The principal minority shareholder in fact, felt
very convinced that the price of $7.50 per share offered for the Com-
modore stock was unreasonably low and only after extended negotiations
was such shareholder in question willing to sell at that price.
As further evidence that the values determined for the stock and the
debentures were fair and reasonable, the following is particularly signi-
ficant. The earnings per share of Commodore for the years 1959 to
1962 inclusive, were respectively, 220, 450, 890 and $1.10.
If the earnings for 1961 and 1962 were capitalized on a ten year
137
Three Acquisitions
basis, which we consider to be reasonable, the value of the Commodore
common stock would be $8.90 per share and $11.00 per share respec-
tively. This is considerably more than the price paid for the stock,
namely, $7.50.
If, on the other hand, the earnings for 1961 and 1962 were adjusted
to eliminate inter-company management fees, the capitalized earnings for
those two years would be $14.20 and $17.60 respectively, i.e. in excess
of twice the price paid for the Commodore common shares.
We shall be glad to review this in further detail with you if you
consider it necessary or helpful."
It should be remembered in considering this document that the
income tax authorities were primarily interested in the 50% premium
paid on the conversion of Commodore Sales Acceptance debentures and
the valuation of Commodore Sales Acceptance shares. Some of the
statements contained in it require critical examination. In fact, as already
noticed, the Atlantic board made its decision to acquire the debentures
not early in 1961 but on November 17, 1960, barely three months after
quite unnecessarily creating them. The contention that Commodore
Sales Acceptance required additional funds which "unfortunately were
not available from the minority shareholders" was in the highest degree
disingenuous because Atlantic controlled its lending policies and was
quite capable of supplying any additional funds required by borrowers
from its own industrial division. The statement that "Atlantic could
no longer continue to be philanthropic in the interest of the minority
shareholders" must provoke a smile or an exclamation, depending upon
the temperament of the reader. A more melancholy reaction is produced
by reflecting on "the soundness of the planning by Atlantic" resulting
in loans to Commodore Sales Acceptance of $13,200,000 by the end
of 1962. If the "principal minority shareholder" with whom Altantic
dealt, among others, "at arms length" was British Mortgage & Trust
Company, it was represented by its president, Mr. Gregory, on the boards
of both companies. He was described by Rooney as having played the
part of the devil's advocate in urging a price higher than $7.50 a share,
and by Christie as having said that Atlantic was getting the shares of
Commodore Sales Acceptance at a good price, whereat Christie with
good reason said: "Why not? We are all directors of Atlantic". All the
evidence indicates that it was on this occasion, and this occasion alone,
that Gregory had anything to say on the subject and the impression he
gave both Christie and Rooney was that his contentions were only half-
serious. If on the other hand the principal minority shareholder was
Annett & Co., or Annett Partners, it may be recalled that Annett & Co.
were fiscal agents for Atlantic during this period and until 1963 were
unlikely to hazard much in the interests of the minority shareholders,
even if there had been any real grounds for not accepting a windfall of
almost extravagant proportions. Needless to say, Exhibit "A" to this
138
Chapter V
letter, showing the minority shareholders from whom Commodore Sales
Acceptance shares were acquired, does not identify the actual owner of
those attributed to Netherlands Overseas Corporation or those whose
holdings were included in those of Annett Partners, and the same is true
of Exhibit "B" with respect to the debentures.
Light is cast upon Morgan's motives at the time of the incorpora-
tion of Commodore Sales Acceptance by the evidence of Rooney2 who
testified that Morgan told the Atlantic directors that the reasons for
taking only a 5 1 % interest in the new company were, first, that Com-
modore Portable Typewriter wanted an interest and, second, economy.
Morgan had said that the introduction of Commodore Portable Type-
writer to Atlantic had been made by the Bank of Nova Scotia, and
Rooney maintained that he never knew of the 24% interest of Annett &
Co. His later impression was that Tramiel and Kapp had taken no
pecuniary interest in Commodore Sales Acceptance and he was not
aware of the means by which they had been put in funds to do so. Nor
did he know of the position taken by British Mortgage & Trust and
Wilfrid Gregory until the spring of 1961. He said he was "vaguely
aware" of the enlargement of Atlantic's investment made to maintain
its 51 % position of control but not of the specific form of the investment.
He knew of the existence of other shareholders because of the appear-
ance of new directors on the Commodore Sales Acceptance board,
particularly Laidlaw with whom he was acquainted. Finally he said
that he did not know of Christie's investment in Commodore Sales
Acceptance until just before he testified to the Commission, but he
admitted that Christie had declared his interest at a meeting of the
directors of Atlantic. Christie himself said that he had first heard of the
formation of Commodore Sales Acceptance from Carman King at a
time when he was not an officer of Great Northern Capital Corporation
or a director of Atlantic Acceptance and that he had suggested that the
factoring of Commodore Portable Typewriter should be done by Atlan-
tic itself, whereupon King told him that Tramiel and Kapp were the
stumbling-blocks.3 King, however, gave him an optimistic account of
the business of Commodore Portable Typewriter from time to time,
mentioning their sales to Eaton's and Simpson's in Toronto and to
Macy's and other stores in New York where Christie made inquiries
personally. From conversations with Morgan he firmly believed that the
latter had no interest in Commodore Sales Acceptance.
I accept the evidence of Rooney and Christie on these points.
There is no doubt that Morgan concealed his own position in Com-
modore Sales Acceptance, which depended entirely upon the participa-
tion which he had arranged with King for Commodore Portable
Typewriter, and there is similarly no doubt that both Morgan and King
'Evidence Volume 90.
"Evidence Volume 9 1 .
139
Three Acquisitions
misrepresented the motives of Tramiel and Kapp who were in no position
to make terms as to participation with their benefactors. I also accept
Christie's statement that he did not know, when he purchased shares and
obligations of Commodore Sales Acceptance, that these would be acquired
by Atlantic. I have more difficulty with the assertion that he sold all of
the shares then held by his wife and himself over the counter through
Annett & Co. at $6 per share, not knowing that they were being bought
by Atlantic in March 1961. He was present at the meeting of the
Atlantic board on February 6 which authorized the purchase by C. P.
Morgan on behalf of the company of all the shares of Commodore Sales
Acceptance that he could buy at a price not to exceed that amount, and
he testified to his uneasiness about having dealings with the company, a
feeling which led him to insist on the final transaction, involving the
conversion of the debentures of Commodore Sales Acceptance and the
exchange of its shares, be approved by counsel. If he did not actually
know who bought his own and his wife's shares at $6, he should have
known, and I am satisfied that he guessed correctly. Furthermore he
was present at the meeting of the Atlantic board on November 17, 1960
which had approved of the exact form of the final acquisition, and
although as a debenture-holder he was unable to convert of his own
volition until after the event, he knew then what his position was and
indeed had shared in creating it.
The third representative of Great Northern Capital upon the board
of Atlantic Acceptance was W. H. Wallace. He had met Christie when
the latter was with the Sun Life Assurance Company in Montreal and
they had been next-door neighbours in the Town of Mount Royal. Later
in New York the association continued, and here Wallace met King who
subsequently recommended the shares of Commodore Sales Acceptance
as a speculative investment. Strangely enough, he did not know of
Atlantic's interest in the latter until he was compelled to surrender his
own interest in May 1961. Since he became a director of Atlantic on
April 10, 1959 and since Atlantic had acquired its 51% of Commodore
Sales Acceptance the month before, this is iust credible. Wallace agreed
that the Atlantic annual statement for I9604 listed Commodore Sales
Acceptance as a subsidiary and that the 1961 statement set forth the
fact that 47,745 shares had been issued "in exchange for minority share-
holders' interest in a subsidiary company". Making every allowance for
the fact that Wallace's residence and business interests were in Montreal,
this lack of knowledge is at once a tribute to Morgan's ability to elude
discussion and an indication of inattentiveness on the part of an Atlantic
director which was not exceptional.
Wilfrid Gregory owed his introduction to Commodore Sales Accept-
ance, and indeed to C. P. Morgan, to Carman King5 and it was through
•Exhibit 41.
"Evidence Volume 1 15.
140
Chapter V
King that he and British Mortgage & Trust purchased their shares and
notes of Commodore Sales Acceptance. As a director of the company
from August 1960 onwards he was not aware of any actual meetings of
the board in the formal sense of the word, and said that he signed the
necessary documents on the occasion and after the conclusion of Atlantic
meetings. The location of the offices of Commodore Sales Acceptance
at 100 Adelaide Street West was, he said, "beyond my ken or interest".
Other than its business being some kind of factoring he knew nothing
about it, although he agreed that he must have been told, and he claimed
that he had no reason to believe that Atlantic would acquire the interest
of the minority shareholders when the investment was made. When this
transpired he was not in favour of it because Commodore Sales Accept-
ance appeared to be doing well; Morgan and Christie had overridden
him. He felt that he had made a "reasonable profit" but he had held his
Atlantic shares to the end. I have already indicated my view of the
participation of British Mortgage & Trust in this enterprise, and I
can only add that Gregory's evidence given to the Commission on April
26, 1967 was offered with such apparent indifference as would, in the
case of a witness less encumbered by misfortune, have amounted to
arrogance. To be sure, it was given early on the first day of his testimony
at a time when all observers noted the confidence of his bearing, but it
left me with the impression that he had little appreciation of his obliga-
tions as a director of Atlantic and as the president and managing director
of his trust company, other than to make a profit for the latter. Later he
was to confirm this by an interesting statement on morality in business
which will be noticed in due course. In the discussion as to the valuation
of Commodore Sales Acceptance shares at the meeting of the Atlantic
board on April 27, 1961 the advocacy of a higher price was not taken
seriously by Christie and Rooney according to their own statements, and
apparently not even by Morgan, but it may have been candid enough.
Aubrey Medland also said that he did not know the circumstances
of Atlantic's original participation in Commodore Sales Acceptance for
the same reason as Wallace, in that it had happened just prior to his
re-election as a director. He did not acquire, and was not offered any
participation personally until, as he said, about two weeks before the
acquisition of the minority interest. King suggested then that he buy
shares. He did not do so, and, as mentioned above, he referred to this
offer in the meeting of April 27, with which it must have been exactly
contemporaneous, as being lower than what was proposed. Christie's
expression of disbelief, and the fact that most of his fellow directors
were obviously going to do well out of the transaction were sources of
irritation, and he was fair enough to say that this was perhaps the reason
for his abstention from voting rather than any disagreement in principle
with the resolution, although he was not prepared to trust his memory
on this point. It is strange that the most inquisitive, and perhaps the
141
Three Acquisitions
most conscientious of the Atlantic directors knew at this time almost
nothing about the business of Commodore Sales Acceptance or the
nature of Atlantic's participation in it, but I am satisfied that Medland
made a frank disclosure of what he recollected and did not try to bathe
his own position in a favourable light.6
Carman King's recollection of the beginnings of Commodore Sales
Acceptance was given to the Commission on December 21, 1966, one
of several occasions on which he testified.7 He said that Annett & Co.
had spent some three months in having made by accountants, engineers
and business consultants a survey of the possibility of making a public
issue on behalf of Commodore Portable Typewriter, and it was only after
the firm had concluded that the project was not feasible, and had imparted
this view to Tramiel, that Tramiel himself had suggested starting a factor-
ing company in conjunction with Atlantic Acceptance with which he
knew Annett & Co. was connected. Tramiel, according to King, went on
to describe how he was importing typewriters from Czechoslovakia on
the strength of bills of lading from the American Express Company and
his order from Eaton's for 100,000 machines payable in 90 days.
That this was how the question of approaching Atlantic was introduced,
and that this was the first time Annett & Co. had learned about the
existing financial arrangements of Commodore Portable Typewriter, is
inherently improbable, as is King's subsequent statement that, "if I
remember correctly Jack Tramiel said he had $25,000 to invest". The
air of improbability intensifies when, upon being asked by counsel if he
were not surprised that Tramiel was in a position to lend $25,000 to
the proposed company, he answered, "I didn't know anything about Mr.
Tramiel's stock. I mean, we just met him, and I can't recall, but I thought
he said — that he said that he had made this money out of his typewriter
business". After three months of careful analysis at what must have been
some expense by Annett & Co. one might have thought that not only the
ability but the inclination of Tramiel and Kapp to make an investment
of this size, when engaged in what was admittedly an unprofitable busi-
ness which neither the banks nor Annett & Co. could assist any further,
would be well understood. More credible is King's statement that once
Tramiel had been introduced to Morgan the latter took over the organ-
ization of the factoring business and the loaning policy of Commodore
Sales Acceptance, and that Annett & Co. had nothing further to do
with that aspect. Yet, as between Christie's assertion that it was King
who persuaded him to invest in notes and shares of Commodore Sales
Acceptance and King's that it must have been Morgan, I have no hesita-
tion in accepting Christie's version. King said that the decision to offer
convertible 1 5-year debentures in exchange for the term notes of Com-
modore Sales Acceptance was taken in the spring of 1960 and the
•Evidence Volume 92.
7 Evidence Volume 93.
142
Chapter V
discussions between himself and Morgan about the terms of acquiring
the minority interest in November or December of that year. He offered,
as one reason for the acquisition, the insistence of the Massachusetts
Mutual Life Insurance Company, as a lender to Atlantic, that the com-
pany should only have fully-owned subsidiaries, but admitted that Com-
modore Sales Acceptance was specifically excluded and that, in any
event, the trust deed securing the senior notes of Atlantic did not pre-
vent it from continuing to maintain only its 5 1 % interest.
A transaction previously referred to, in which the last ounce of
profit was squeezed out of the final exchange of shares and debentures
for Atlantic stock, was clearly, if somewhat hesitantly described in Mr.
Shepherd's examination of this witness.8
"Q. In April, 1961, I take it from the minutes it was already well
known to the holders of the minority interest, that although perhaps all
formal steps had not yet been taken, Atlantic was going to acquire the
Commodore Sales shares and was going to deliver Atlantic shares in
payment therefor, is that correct?
A. Yes.
Q. And is it not correct that during the month of April, 1961, you and
Mr. Christie and Mr. Gregory sold a number of shares (in your own
case it was 3,180) of Atlantic Acceptance on the market, knowing that
shortly you were going to receive those shares arising out of this ex-
change, is that correct?
A. Yes.
Q. Therefore, technically, but only technically, you were short and duly
declared yourself short, for a matter of some days; that is, you had sold
the stock and you knew delivery was coming?
A. Yes.
Q. Out of this share exchange?
A. But I did not declare that I was short, because in my mind I was
not.
Q. I believe on the Annett day —
A. Annett blotter?
Q. Annett blotter, I believe you are recorded there as being short, is
that correct?
A. I don't know. I mean, the trading department would know what I
was doing, and so that was a requirement that they would state that.
Q. What I wanted to ask you about is at about 1st May, 1961, there
was a transaction whereby British Mortgage & Trust delivered to An-
netts the 5,000 shares of Atlantic Acceptance which had been owned by
'Evidence Volume 93, pp. 12630-4.
143
Three Acquisitions
British Mortgage & Trust, and Annetts delivered to British Mortgage &
Trust a cheque for $110,000, being the purchase price at $22, which
cheque was promptly negotiated by British Mortgage & Trust. Annetts
then caused the certificate in question to be changed respecting its owner-
ship, so that it was divided and it stood in the name of Annett and Com-
pany and delivered those shares in the normal course in settlement of
your obligation to deliver shares which had been sold.
Then on 16th May, Annett sold back to British Mortgage & Trust
5,000 shares of Atlantic, using for this purpose, of course, the shares
which had come out in connection with the share exchange with Com-
modore Sales Acceptance for $110,000. Now, what is that transaction
all about?
A. Well, I would say that was — that we had borrowed 5,000 shares
from the British Mortgage & Trust, which was a customary thing on the
street with brokers and banks and institutions; and the way we did it, I
cannot recall that we put through tickets, but we would have to pay a
certain value which was $110,000, and them get the use of the money.
We got the shares and then when we received the shares from the Char-
tered Trust we returned them and the money was repaid.
I would think that that. $110,000 would be debited proportionately to
the different accounts that required the shares.
Q. It appears to take the form of a purchase of shares from British
Mortgage & Trust and subsequently, approximately 15 days later, a sale
back to British Mortgage & Trust of the same number of shares. Could
you expand further on your observation that this is the form in which
shares are borrowed and replaced?
A. Well, I don't know enough about it. I don't know if this is the cus-
tomary way that shares are borrowed, but I imagine that in the conver-
sation that probably took place between myself and Wilfrid Gregory,
that this is what they wanted. In other words they got the $110,000,
and whether the shares were selling at $20 at the time and they got $22,
they then didn't want to lose their position in Atlantic shares, and we
returned them and they returned the money.
Q. So far as we have found, there is no written documentation relating
to this transaction in the form of contracts or undertakings by British
Mortgage to buy the shares back, would that be correct?
A. Were there any contracts issued? Did we issue a contract buying the
5,000 shares and then we issue another contract selling them?
Q. I am not aware of this, if it was done, Mr. King.
A. I would think this would be just out of our records, and I wouldn't
think that any contract was issued, because we were not really buying
the shares and were not selling them: We were just borrowing them.
Q. What was the payment of the $1 10,000 to British Mortgage & Trust?
A. That represented $22 a share on 5,000 shares.
144
Chapter V
Q. Yes, but could you help us as to how that fits into this pattern of
borrowing stock?
A. Well, I just don't know the exact role. You know, you can borrow
stock on the floor of the Toronto Stock Exchange, from another broker.
Now, I don't know. I know in the bond business that dealers often
borrow bonds from banks, usually, and they pay them for the bonds, and
they usually pay some margin or some small fee.
Q. Do you recall any discussion in which this transaction was arranged?
A. No.
Q. Do you recall anything more about it than that which you have al-
ready testified?
A. I cannot recall anything. I know this, that one of the auditing firms
that is working for the Commission, came into our office wanted an ex-
planation of this $110,000.
Q. Yes?
A. And we couldn't figure it out. I mean, this is quite a while ago. Then
we realized that it must be the borrowing of 5,000 Atlantic shares, and
this is a customary thing, I would say, in the financial business of Can-
ada.
Q. When you dealt with British Mortgage & Trust, with whom did you
deal?
A. With Mr. Wilfrid Gregory."
Although King was a director of Commodore Sales Acceptance until
May 15, 1961, he was, by his own account, unaware of the nature of its
accounts receivable, except in so far as he believed them to be the fac-
tored receivables of Commodore Portable Typewriter. He appears to
have been satisfied with the apparent profitability of the company and to
have relied upon Morgan and Atlantic for the management of its affairs.
His concern as a stockbroker was with the transactions in shares and
obligations, and with these he was closely concerned.
Morgan's inveterate "one-handedness" has been referred to before
and Atlantic's acquisition of the minority interest in Commodore Sales
Acceptance, for the existence of which he alone was responsible, is a
good illustration of the left hand not knowing what the right hand was
doing. First of all a tentative and instinctive step is taken, providing
Atlantic with bare control, and giving room for subsequent manoeuvre
within the confines of the holdings of the minority group. Then loans
are made not merely to Commodore Portable Typewriter, which is the
principal reason for the factoring company's existence, but to other
borrowers with large appetites and exiguous assets. Thereafter a situation
is created, probably by design but, if inadvertently, with a large measure
of incompetence, whereby Atlantic cannot acquire a larger or a total
145
Three Acquisitions
interest without conferring substantial benefits on the minority share-
holders and, as soon as this becomes apparent, Morgan makes a secret,
and therefore dishonest profit initially at the expense of Tramiel and
Kapp, yet in such a way as to provide them with compensation; Wagman
and King who know most of the real situation of Commodore Portable
Typewriter, and who alone are essential to Morgans method of enriching
himself, are handsomely rewarded; the directors of Atlantic are placed in
a position where their hands are tied and their sense of duty blunted by
their own participation; and the cost of what is hailed as a shrewd stroke
of business, but is more recognizable as an expensive blunder, is borne
by the shareholders of Atlantic Acceptance to the extent of over half a
million dollars of unnecessary expenditure.
C. P. Morgan Acquires Aurora Leasing Corporation
Evidence of the acquisition and transactions of Aurora Leasing
Corporation was given to the Commission by Mr. C. T. Austin, C.A. of
Clarkson, Gordon & Co.1 The company was incorporated as a private
company by letters patent issued under the hand of the Secretary of
State of Canada on June 12, 1956 and carried on the business of renting
equipment to contractors, during the course of which it acquired as a
wholly-owned subsidiary company, Mavety Film Delivery Limited,
which held valuable contracts with Twentieth Century-Fox and Famous
Players for the delivery of cinematographic film. Minutes of the board
of directors dated March 25, 1959 indicate the intention of the directors
to wind up Aurora Leasing after submission of the question to a general
meeting of shareholders which agreed with this proposal on April 9.
Action to wind up, however, was not taken and the company continued
its business on a diminishing scale until September 30, 1960, when C. P.
Morgan appeared on the scene as a potential purchaser.
Although the board of directors of Atlantic Acceptance had discussed
on June 28 of the same year the possibility of forming a subsidiary com-
pany to engage in the leasing of plant facilities, it was not as a representa-
tive of Atlantic that Morgan appeared, since he was not armed with any
authority from the Atlantic board to make the acquisition now contem-
plated. He had, however, been considering acquiring Aurora Leasing in
discussions with Morton W. Rashkis, a Toronto accountant and manage-
ment consultant who had a minority interest in the company which was
controlled by J. George Meckler and M. J. Lazar, both of Bedford, Ohio.
An agreement dated September 30, 1960 was concluded between Lazar,
C. Powell Morgan and Aurora Leasing Corporation Limited whereby
Evidence Volume 9.
146
Chapter V
Morgan as purchaser agreed to buy 2,770 common shares of Aurora
Leasing from Meckler and Lazar, representing a group of selling share-
holders.2 The agreement recites that the authorized capital of the
company consists of 450 unissued preference shares, and 5000 issued
common shares without nominal or par value issued — and this agrees
with the company's share transfer records — to the following:
Morton W. Rashkis 2,228
Morton Greenspan (in trust for Rashkis) 1
Daniel A. Lang (in trust for Rashkis) 1
J. George Meckler 1,080
M. J. Lazar 935
A. Katz 180
Frances (Fanny) Meckler 175
Abraham Werier 150
Samuel Werier 150
Jack Sturnman 50
Thelma Sturnman 50
5,000
The "selling group" therefore consisted of all the shareholders except
Morton W. Rashkis and those who held in trust for him.
For these shares Morgan was first to pay $50,000 in Canadian
funds; then he was to provide Aurora Leasing with a loan of $110,000
in United States funds and cause it to pay off certain loans made by
shareholders, but specifically excluding a loan from Lavan Trust Com-
pany; he would pay off other debts in the amount of $21,498.60 and
secure the payment to Meckler and Lazar by the company of $44,000
in United States funds for which they agreed to take the company's note
in that amount, guaranteed by Morgan and payable on or before January
18, 1961 with interest at 6% per annum. Numerous other covenants
were contained in the agreement relating generally to performance of the
contract and to the affairs of Mavety Film Delivery, and involved an
income tax liability in respect of the year 1959 of $74,347. On the
same day Morgan executed a direction to Aurora, its directors and its
solicitor, Mr. Daniel A. Lang, in the following terms:3
"Notwithstanding the terms of an Agreement of Purchase and Sale
dated on this date, wherein I was to purchase two thousand, seven hun-
dred and seventy (2,770) common shares of Aurora Leasing Corpora-
tion Ltd. from Messrs. Meckler and Lazar, let this be your good and
sufficient authority to transfer the said two thousand, seven hundred and
seventy (2,770) common shares of the Company to my solicitor, Carl
M. Solomon."
'Exhibit 923.
•Exhibit 924.
147
Three Acquisitions
In a contemporary transaction on, or at least dated October 14,
Aurora agreed to sell to Corporate Plan Leasing Limited (a vehicle of
Meckler and Lazar) the equipment subject to leases which it owned,
covenanting to discontinue the leasing business until such time as the
purchaser disposed of or discontinued the business of leasing, or until the
expiration of the leases to which the equipment was subject, or until such
time as the existing board of directors of Corporate Plan Leasing ceased
to have any substantial financial interest in the company, whichever might
occur first. The agreement of purchase and sale4 sets the total purchase
price at $190,000 consisting of $145,000 for the equipment and $45,000
for good-will, payable by $50,000 in cash, $83,883.64 by assumption
by the purchaser of the encumbrances on the equipment plus periodic
payments as rentals became due less payments required to discharge the
encumbrances assumed. The agreement is signed for Aurora by C. P.
Morgan and Harry Wagman over the company's seal and there is a
similar direction signed for Aurora by Morgan5 addressed to Messrs.
Lang, Michener & Cranston, the purchaser's solicitors, dated October
14, which was the date of closing, instructing them to pay the balance
to "our solicitors, Messrs. Solomon & Samuel". Neither at this time nor
thereafter was Morgan a director, officer or registered shareholder of
Aurora Leasing Corporation.
Carl M. Solomon
Both the agreements were drawn as appears on their backs by
Messrs. Solomon & Samuel, barristers and solicitors of 62 Richmond
Street West, a Toronto firm which has been mentioned before under that
name or that of its successor, Solomon & Singer. Carl Morton Solomon
was called to the bar of Ontario in 1958 and, after only a year of work
with established solicitors, set up his own firm in June 1959 with David
Murray Samuel, also called in 1958. This association lasted until May 1,
1962 when Samuel withdrew to start his own practice and Solomon was
joined by Irwin Singer, qualified in that year. Solomon met Morgan
towards the end of 1959 through Walton, Wagman & Co. who had
offices in the same building, and, as will be seen, first acted for him and
his associates in the John Belli affair. He was an ambitious but inexperi-
enced young lawyer, anxious to do corporation work and looking to
W. L. Walton and Harry Wagman to introduce him to it. He was, as he
has said, overwhelmingly impressed by Morgan and the position in the
financial world which he apparently occupied and looked forward to the
day when his firm would do all the legal work for Atlantic Acceptance.
The day never came, but Solomon and his parners proved invaluable as
an instrument in the subterranean transactions of Morgan, Walton and
Wagman which, profitable as they were, would cost him dear in credit
and professional reputation.
'Exhibit 926.
5Exhibit 927.
148
Chapter V
The general ledger of Aurora Leasing1 shows a journal entry, dated
October 1, crediting the account of C. M. Solomon in trust with $50,000
and the account of Corporate Plan Leasing with the same amount, with
the note: "to record monies paid by latter to former as per agreement".
A cheque dated October 16 was drawn on the general account of
Solomon & Samuel, made payable to Meckler & Lazar in the amount of
$50,000 and marked "re purchase shares Aurora Leasing Corp. Ltd. by
C. Powell Morgan", and the firm's clients' ledger for Aurora Leasing
shows $50,000 coming into the general account from Corporate Plan
Leasing on October 17 but going out the day before for that purpose;
the account is shown as flat on October 16.2 At this point Morgan had
acquired, and caused to be transferred to Carl M. Solomon, shares giving
control of Aurora Leasing and paid for them with that company's money
which did not, as one might have expected, find its way into the solicitors'
trust account.
There remained the 2,230 common shares belonging to Morton
W. Rashkis. These were purchased, according to the terms of an agree-
ment made between him and Carl M. Solomon, dated November 4, for
the sum of $20,000, $5,000 having already been paid and acknowledged,
$5,000 being payable on the execution of the agreement on November 4,
with the balance of $10,000 payable in monthly instalments commenc-
ing December 1. This payment was actually compounded on January 13,
1961, and at that time Rashkis received a balance which gave him $9,000
by conceding a discount of $1,000, so that the total cost of all the 5,000
snares acquired by Solomon for Morgan was $69,000 of which $50,000
was in fact Aurora's money.
The Trio Account and Use of Commodore Sales Acceptance Funds
Although the agreement of September 30 between Morgan and
Meckler and Lazar provided for the former lending to Aurora the
$1 10,000 United States funds required to pay off the shareholders' loans,
payment was actually made through the Solomon & Samuel general
account which received a cheque for $100,000 in that currency — then
at a discount in Canada — from Commodore Sales Acceptance on
October 14;1 it was recorded by Commodore Sales Acceptance as a loan
to Carl Solomon in trust and two cheques totalling $25,000, one being
for $8,333.33 drawn by C. P. Morgan2 and the other drawn on account
No. 13324 at the Guaranty Trust Company of Canada by William L.
Walton, noted as "joint account", for $16,666.67,3 both in favour of
Carl M. Solomon in trust, were deposited in the firm's trust account. The
account at the Guaranty Trust Company plays a large part in the joint
Exhibit 928.
'Exhibit 692.
Exhibit 932.
•Exhibit 933.
•Exhibit 801.
149
Three Acquisitions
ventures of Morgan, Walton and Wagman. Passbooks, cheque books,
cancelled cheques and deposit books in connection with it were seized by
special investigators of the Department of National Revenue from the
offices of Walton, Wagman & Co. in December 1963 when they were
investigating the affairs of Walton, and were put in evidence by Mr.
Thomas McGeachy of that department on March 11, 1966,4 while the
ledger cards and credit and debit vouchers were offered by Mr. D. C.
Dunlop of the Guaranty Trust Company on the same day. It was
ostensibly a joint account of W. L. Walton and Harry Wagman, but
it was used from 1960 until 1963 to transact business in which they were
associated as equal partners with C. P. Morgan. A great many sub-
sequent references to it will be made and in due course it will have to be
examined in the light of the evidence given by Walton, Wagman and
Morgan himself, but it may suffice here to say that without its discovery
and analysis together with documents found in Walton's house it would
have proved extremely difficult, if not impossible to unravel transactions
which are essential to an understanding of the methods by which these
three men, all chartered accountants and two of them practising, enriched
themselves at the expense of Atlantic Acceptance, or companies with
which it was associated or to which it had lent money. The account was
variously known to Walton and Wagman as the "Trio account" or
"Account of Three", but hereafter it will be referred to as the Trio
account.
On October 16 the shareholders' loans which Aurora had cov-
enanted to pay were duly paid off out of the Solomon & Samuel general
account in the amount of $111,131 from the funds supplied by Com-
modore Sales Acceptance and Morgan, Walton and Wagman, thus
creating debts to them. Commodore Sales Acceptance was paid off in
the amount of $100,000 U.S. funds with interest on December 16, 1960
(erroneously recorded as being December 16, 1961) after a great deal of
water had flowed under the bridge. Of the debts remaining in the
amount of $21,498.60 Solomon & Samuel paid $4,211.13 to Smith,
Winston, Wolman, Roth and Smith on November 29 and $1,237.30 to
Messrs. Lang, Michener & Cranston on December 12. Solomon &
Samuel received a further $27,476.42 by cheque from Aurora Leasing
Corporation made payable to C. M. Solomon in trust. This cheque5
which was found, together with the accountant's working papers which
explain it, in the office of Harry Wagman at the time of the Walton
seizure, is referred to by a note reading "issue cheque to Solomon in
trust re Lavan Trust $14,000, re loans payable $9,976.42." The explana-
tion falls short of the amount of the cheque by $3,500. The only amount
corresponding to this in Aurora's indebtedness is a debt to solicitors by
the name of Rosenberg, Smith, Walsh & Kroll. The amount of
'Exhibits 799-807.
"Exhibit 865.
150
Chapter V
$9,976.42 is a mystery in that it appears to be a sum left over after the
accounts sold to Corporate Plan Leasing were closed off, arising from
calculations of deferred revenue and recorded by Aurora as "miscellan-
eous loans payable" in order to balance its books, by this time in the
hands of Walton, Wagman & Co. As it turned out Solomon & Samuel
were able to settle the Rosenberg debt for $2,500, but the $14,000 pay-
able to Lavan Trust was not paid until 1964 by which time it had grown
to $15,000. The payment then made was quite separate from any of the
moneys being disbursed at this point and was made, with funds supplied
by Harry Wagman, to Messrs. Allen, Regan & Hunter, acting for a
company known as Tapir.
After the payment of the shareholders' loans on behalf of Aurora
and with money supplied by Commodore Sales Acceptance, Morgan
and the Trio account, Solomon & Samuel had left in their general
account a credit balance of $82.76 from adjustments of exchange. The
funds held in their trust account on behalf of Aurora, after the transfer
of $11,000 from the $25,000 supplied by Morgan and the Trio account,
amounted to $14,000 and were still further depleted by payments to
Rashkis for his minority shareholdings and others that have been
noticed. Although on December 27 Aurora had recorded in its general
journal a credit to C. M. Solomon in trust which included the loan pay-
able to Meckler and Lazar of $44,000, Solomon did not pay it because
he was about to pay out the balance of the moneys held in trust for
Aurora to W. L. Walton in trust. For purposes of convenience all the
contemporaneous payments of this kind are noted below:
December 16 — $12,000
December 30 — $24,040
December 30 — $60,974.21
December 30 — $82.76 marked "Balance in Aurora Leas-
ing Account"
April 7, 1961 — $1,000 marked "Balance Aurora Leasing
Corporation Limited Trust Fund"
September 18, 1961 — $420 marked "In settlement of Aurora
Leasing Corporation Limited."
The $82.76 has already been identified and the payment made on April
7, 1961 of $1,000 will be referred to; that made on September 18, 1961
of $420 was a repayment by Solomon & Samuel of an overpayment of
fees, but the payment made on December 16 and the two substantial
payments on December 30, amounting in aggregate to $96,974.21, re-
quire a lengthy explanation of how that sum got into the solicitors' trust
account in the first place.
Before proceeding with this aspect of the matter a word should be
said about remaining obligations of Aurora and C. P. Morgan under
the purchase agreement of September 30, 1960 concluded with Meckler
151
Three Acquisitions
and Lazar. Three trifling accounts in the amounts of $300 to Corporate
Plan Leasing Limited, $712 to Jacroy Canada Limited and $375 to
Lease Plan International were repaid by Aurora itself and not by
Solomon & Samuel. An amount of $7,163.17, entered in the schedule
of shareholders' loans to be paid under that agreement and described
as accrued interest, was not recorded by Aurora as a liability or as a
payment and does not appear to have been paid by any one. There
remains the indebtedness to Meckler and Lazar of $44,000 which, as
has been seen, Solomon & Samuel did not pay, and in connection with
which, according to the agreement, these creditors were to get a promis-
sory note due January 18, 1961. The note is made by C. P. Morgan in
their favour with interest payable at 6%. One day before the note
became due a cheque was drawn on the Trio account, payable to the
Guaranty Trust Company of Canada in the amount of $40,540,65,°
and the balance of $4,000 due was secured by a new note from Morgan
due April 187 which was not paid when due. A further note for ninety
days was given by Morgan and the balance was eventually paid in the
amount of $4,180.80 on July 10, 19618 to the Central National
Bank of Cleveland, where Meckler and Lazar did their business, and is
identified by a pencilled notation in the Trio account passbook.
W. G. Blacklock and Valley Music Company Limited
The first transaction in which Aurora Leasing Corporation was
used by Morgan, Walton and Wagman concerned Valley Music Com-
pany Limited which owned and installed in suitable premises in eastern
Ontario coin-operated automatic phonographs and amusement machines.
This was an enterprise of William George Blacklock, a native of Fron-
tenac County, who lived in Cornwall, Ontario, and who was a drover,
like his father, and an automobile dealer. Blacklock, a volatile and
voluble witness before the Commission, was by the end of 1960 heavily
indebted to Atlantic Acceptance among others in more than one capacity.
Blacklock's performance as a witness,1 discursive, irrelevant and, when
pressed on simple yet unpalatable points, alternately excitable and ob-
stinate, clearly indicated what he must have been like as a business
associate. He apparently became a customer of Atlantic in 1956, princi-
pally in connection with the Valley Music Company. By the end of
1958 the indebtedness of this enterprise to Atlantic amounted to some-
thing in the order of $148,000 and it was clear to Morgan that it was
not a good account. In 1959 no payments in reduction of this amount
were forthcoming from Valley Music and Atlantic resorted to the device
•Exhibit 921.
'Exhibit 944.
"Exhibit 802.
Evidence Volumes 13-4.
152
Chapter V
of setting up an account called Blacklock Leasing in its own books
through which additional payments were made on Valley Music's behalf.
In October 1959 Atlantic shuffled off the inconvenient indebtedness of
Valley Music on the newly-created Commodore Sales Acceptance by
selling the account to the latter for $120,000, for which it received a
note receivable amounting to $154,440 offset by a reserve for unearned
interest of $34,440. As at December 1, 1960 Commodore Sales Accep-
tance treated this asset as a note receivable of $127,000, less a reserve for
unearned interest of $22,560, leaving a net amount owing of $104,440.
It was a measure of the delinquency of the account and of the difficulties
of Blacklock that, hard on the heels of the acquisition of Aurora, a
resolute effort was made to ameliorate them, and at the same time remove
them from the discernible neighbourhood of Atlantic by arranging for a
second transfer of the liability.
By an agreement dated November 23, 1960 between Valley Music
Company, for which George Blacklock signed as president, and Aurora
Leasing Corporation, for which it was executed by Carl M. Solomon as
president and Harry Wagman as secretary-treasurer, Valley Music sold
to Aurora a quantity of "automatic coin-operated amusement machines"
for $300,000 to be paid by $3,000 in cash, the assumption and payment
of Valley Music's debts and a covenant to execute a lease, on December
1, 1960, by Aurora of the chattels sold back to Valley Music for a
monthly rental of $4,0002 for ten years. The balance of the consider-
ation was met by Aurora giving Valley Music convertible promissory
notes in the amount of $90,000, bearing interest at 7% per annum and
maturing on December 31, 1965, no provision being made for any
repavment of principal until that date. As a financial transaction the
result was no bargain for Aurora as even a cursory inspection of the
financial statements of Valley Music and its predecessor company, Corn-
wall Music Company, over the years 1953 to 1959 makes very plain.
Cornwall Music Company, a partnership of George Blacklock and one,
Thibault, terminated on June 1 , 1 956 when Blacklock bought Thibault's
interest and Vallev Music was incorporated. In 1953 the business lost
$25,500 in round figures after recording depreciation of $21,544. In
1954 the loss was $26,250 after taking depreciation of $21,286 on the
coin-operated machines. In 1955 no depreciation was taken and the
loss was $4,209; on the same basis in 1956 the loss was $8,290. A
profit was shown for the first time in 1957 of some $7,300 after depreci-
ation of $7,000, but in 1958 the company operated at a loss of almost
$31,000 without depreciation being recorded. Finally in 1959. and
similarly without depreciation being taken, the company lost $48,1 13.24.
Looking only at the last two years, in 1958, on the assumption that the
machines would be depreciable under Class 8 for income tax purposes.
'Exhibit 946.
153
Three Acquisitions
the loss after depreciation would have been approximately $66,000 and
in 1959, $78,000.3 Austin concluded that the book value of the assets
of Valley Music purchased by the company was at December 31, 1959
approximately $400,000, but that had depreciation been taken year by
year at the permissible rate it would have been only $260,000. This was
the record of a company which had contracted to pay a monthly rental
of $4,000 to Aurora over a period of ten years.
Walton Pays the Debts of Valley Music Company
Some degree of security might have been obtained had Aurora re-
tained possession of the $90,000 in notes as a pledge of Valley Music's
performance, but the agreement is silent as to any restriction on their
disposition. In fact, and in a manner which will be examined in more
detail, the notes were transferred to Blacklock almost immediately in
satisfaction of a debt of Valley Music to him, together with the $3,000
cash payment. But meanwhile there were Valley Music's debts to be
paid and these, according to the agreement,1 consisted of $64,000 pay-
able with interest at 1 3 % to Traders Finance Corporation Limited and
secured by chattel mortgage, $14,000 to Laniel Amusements Inc. with
interest at the same rate and $129,000 expressed as being due to Atlantic
Acceptance Corporation Limited with interest accruing at 9% per
annum. For the purpose of discharging these, as might have been pre-
dicted, Aurora obtained a cheque for $207,000 from Commodore Sales
Acceptance2 payable to W. L. Walton in trust and Walton deposited the
money in his firm's trust account, being No. 9771 of the Guaranty Trust
Company, on December 19. Walton paid Commodore Sales Acceptance,
an actual creditor of Valley Music, the sum of $104,433.63 which is the
difference between a note receivable balance, shown as at December 19
as $126,600, and a reserve for unearned interest of $33,166.37, the
latter having inexplicably risen nearly $11,000 since December 1, and
this closes the account. Traders Finance gave a full release to Valley
Music upon payment by Walton of $52,110. The Laniel account was
similarly settled in a profitable manner but by a more circuitous route.
Walton paid $10,500 from his trust account into that of Solomon &
Samuel and that firm in turn paid the creditor, securing a release3 and
charging Aurora, not Valley Music, $751 .30 for settling the Traders and
Laniel accounts.
Thereafter, and as a result, Walton had in hand $39,956.37 for
which he did not account to Aurora. What transpired is revealed by the
Walton, Wagman & Co. trust account and by a working paper among
•Exhibit 947.
Exhibit 946.
Exhibits 949-50.
•Exhibit 956.
154
Chapter V
those documents seized by the Department of National Revenue. The
working paper4 shows the following notations in handwriting acknowl-
edged to be Walton's: "Comm gives me 207,000. I pay out Trad. 52
Lan 12 and Comm 105". A balance of $38,000 is then entered and
opposite it is the note, "I pay out direct 25,000", under which is a balanc-
ing figure of $13,000 opposite a further note: "I keep". A copy of a
letter5 from Valley Music, signed by George Blacklock and addressed
to Walton, of December 15, 1960, authorizes the following disburse-
ments: $3,000 to Atlantic Acceptance Corporation Limited, Kingston,
Ontario; $17,400 to Atlantic Acceptance Corporation Limited, Oakville,
Ontario; $575 to G. A. Welch & Co., Cornwall; $4,000 to Aurora Leas-
ing Corporation Limited, Toronto; and $25 to William L. Walton,
"trustee". All these amounts, which total $25,000, are shown as pay-
ments from the Walton, Wagman & Co. trust account.6
Two of C. P. Morgan's rare letters should here be quoted. The first
one is to Davidson at the Atlantic head office at Oakville and it is dated
December 16, I960.7
"I enclose cheque for $17,400.00 re the Blacklock account.
It is suggested that the mortgage account on 2nd & Brookdale be
credited with $10,000. and the general account the balance.
The enclosed cheques to Commodore re Valley are to be cancelled as
Aurora has taken over Valley.
As additional security to our leasing loan to Blacklock the enclosed
interim certificate is to be held by us.
You will be advised when the definitive certificates are available.
Interest at the rate of 1% will be forwarded to Atlantic for Blacklock as
of December 31, 1960 and quarterly thereafter.
Valley will continue to deposit all receipts and transfer to Oakville.
The only payment we will be making as of January 31, 1961 and
monthly thereafter will be $4,000 to Aurora Leasing.
Valley has paid direct the December amount of $4,000.00."
The second is dated the same day and is addressed to George Black-
lock at Valley Music in Cornwall.8
"Enclosed is the cheque for George A. Welch & Co., re Valley Music
audit.
I have disbursed the funds as per the attached direction. Please sign
one copy and return to Herb, for Mr. Walton.
The taxes and interest figures will have to be paid from Oakville."
The direction signed by Blacklock was accordingly made up in
advance, presumably by Walton. "Herb" is Herbert Spanton, a retired
'Exhibit 867.
5Exhibit 957.
•Exhibit 764.
'Exhibit 958.
•Exhibit 959.
155
Three Acquisitions
R.C.M. policeman, who at this time was working as a secretary and
"trouble shooter" for Morgan. He shared an office with McFadden
immediately outside Morgan's private office at 100 Adelaide Street West.
The only payment not traced by Mr. Austin at this time was the $3,000
payable to Atlantic Acceptance at Kingston which Blacklock said was
connected with a wholesale sale of a new car.
Walton had then left in his firm's trust account the sum of
$14,956.37 which was paid into the Trio account on December 31, the
deposit book showing a notation "W.L.W. Account 9771" and a pass-
book showing a similar amount received. Among the Department of
National Revenue seizures is a memorandum in Harry Wagman's hand
headed "account of 3". This, as its opening entry dated December 31,
1960, shows "V. Music, Traders, etc" and a deposit opposite in the
amount of $14,956.37. Finally there is a cheque drawn by Carl M.
Solomon on his firm's trust account, dated November 24, 1960 and pay-
able to C. Powell Morgan, in the amount of $ 1 00,000fmarked "re con-
ditional purchase assets Valley Music Corporation",9 which receives a
holograph acknowledgement from Morgan of the same date, and written
on the notepaper of the "Executive Office", in the following terms, "re-
ceived from Carl Solomon — $10,000 (Ten Thousand) — re Valley
Music Co. Ltd. — to be returned if not consummated by December
31/60 — C. P. Morgan".10 No other explanation of this payment exists
and no indication that it was ever returned in the Solomon & Samuel
trust account or anywhere else, and one can only conclude that Aurora
paid a finder's fee to C. P. Morgan of $10,000 as a reward for effecting
this important acquisition.
Sale of Mavety Film Delivery to N.G.K. Investments
A further transaction must be mentioned briefly. By agreement
dated December 15, 1960 Aurora Leasing Corporation sold its wholly-
owned subsidiary company, Mavety Film Delivery Limited, to N.G.K.
Investments Limited for the price of $256,125 which was the book
value of the Mavety shares. Aurora took a promissory note from N.G.K.
Investments for the whole of this amount yielding 8% per annum and
repayable quarterly as to interest only, the principal sum being due and
payable on December 31, 1965 and not before. No other security was
given to Aurora by N.G.K. Investments, a private Ontario company,
the name of which, as originally applied for, was M.G.K. to represent
Morgan, Gregory and King, incorporated on the same day as the sale
of Mavety Film Delivery. More will be heard of this company, and it
may be noted here that among its original directors were Albert George
•Exhibit 968.
"Exhibit 969.
%r & /OjOOC 156
Chapter V
Woolfrev, the manager of Commodore Sales Acceptance, and Edward
Lawrence Stone, Toronto solicitor, who, in company with other nomi-
nees, gave room to the permanent directors on December 15, C. Powell
Morgan, Carman G. King, Reginald Palmer, Wilfrid P. Gregory and
Sidney Fromer. The agreement of purchase and sale was executed by
Carl M. Solomon as president of Aurora Leasing and by C. P. Morgan
as president of N.G.K, Investments. Ten days previously Solomon &
Samuel paid out of its trust account on behalf of Aurora the sum of
$8,000 to Chartered Management Consultants (of Canada) Limited, the
cheque being marked as follows: "on direction dated December 9, 1960
of Aurora Leasing Corporation Limited for services to Mavety Film
Delivery Limited". Since the Trio of Morgan, Walton and Wagman
who owned Chartered Management Consultants only acquired control
of Aurora on September 30 and since no services were performed by the
former company on Aurora's behalf, this payment, like that of $10,000
to C. P. Morgan in respect of the Valley Music transaction, cannot be
explained or justified.
Early Financing of Aurora Leasing: The Solomon & Samuel Trust
Account
It is now necessary to return to the operations within the Solomon
& Samuel trust account to explain the payments made from it to W. L.
Walton in trust, and assess the real cost to Morgan, Walton and Wagman
of the Aurora acquisition. Aurora was a private company but members
of the public, albeit some with familiar names, were invited to partici-
pate. At a meeting of the Aurora board on December 1, 1960 steps
were taken to authorize the issue of notes due October 31, 1965, bearing
interest at 7% and convertible at the option of the payee at any time
up to December 31, 1965 into one common share of the company for
each $30 loaned to it,1 and to increase the authorized capital to 25,000
common shares by supplementary letters patent which were forthcoming
on December 8. In the meantime subscriptions had already been re-
ceived for shares and notes and money deposited in the Solomon &
Samuel trust account for Aurora as indicated on Table 28, 2 an account-
ant's schedule showing the share and note subscriptions handled through
that account beginning on November 10. Subscriptions of $12,000 each
were received from Granite Investment & Development Limited, a public
company in London, Ontario, and Reginald Palmer who was associated
with it, each of which were issued $10,000 in notes and 100 shares
priced at $20 per share. British Mortgage & Trust Company subscribed
$80,000 for $60,000 of notes and 1,000 shares, and Ann P. Gregory
'Exhibit 287.
•Exhibit 972.
157
Three Acquisitions
$5,000 for 250 shares. On November 21 Annett Partners sub-
scribed $5,000 for shares only, and on December 9 Carman G. King for
the same firm subscribed $34,000 for $20,000 of notes and 700 shares.
The last two subscriptions deposited in the Solomon & Samuel trust
account were from Steinhart Holdings Limited and John Lynch for
$48,080 and $12,020 respectively, for which, in addition to Aurora
shares and notes, they received 400 and 100 shares of N.G.K. Invest-
ments at 20^ a share. Writing to Harry Wagman on November 14
David Samuel advised him of the deposit of the Granite Investment,
Palmer, British Mortgage & Trust and Mrs. W. P. Gregory subscriptions
and that further amounts were to be forwarded from C. G. King, con-
cluding "we will be in touch with Mr. C. P. Morgan within the next few
days for instructions as to the denomination of the shares to be issued
and will advise you further after this has been done". By December 14.
1960, therefore, $208,100 had been deposited in the Solomon & Samuel
trust account and 2,900 of the original 5,000 common shares acquired
on September 30 had been disposed of. The deposit slips for the trust
account do not identify the British Mortgage & Trust subscriptions which
are none the less recorded in Samuel's letter to Wagman. Samuel also
prepared a memorandum for his partner Solomon, dated December 8,3
which is in part as follows and provides information as to the valuation
of the shares as well as throwing light upon their distribution:
"Re: Aurora Leasing Corporation Ltd.
In so far as the purchase of the shares is concerned and the minutes
pertaining thereto, I would appreciate if you would go over the minutes
prepared by Dan Lang as you will note that he has transferred all of
the shares to C. P. Morgan, and they should have been transferred into
your name and the names of Harry Wagman, Bill Walton and myself.
Subsequent minutes and the bank resolution (of which we do not have
a copy in the file) show you as President, Harry as Secretary-Treasurer,
and myself and Bill as Directors.
All of the debts have been paid off other than the debt owing to
Lavan Trust Company and the account owing to Smith, Rosenberg,
etc. We probably should have made a search of Conditional Sales and
Chattel Mortgages registered against the equipment that was purchased
along with the shares.
We possess all of the issued shares of this Company other than the
one that was issued to Morton Greenspoon, and we may yet get that
from our friend Mr. Lo Bruto as I have prepared a transfer for execution
by Greenspoon and have asked Lo Bruto to get it signed as part of
the requirements for the discharge of the debt to Lavan.
Here again we have drawn new minutes which will have to be
signed off by the new directorate. In the immediate meeting after the
■Exhibit 974.
158
Chapter V
new directorate acquires the shares, there should be a resolution as to
the sale of equipment to Corporate Leasing and that agreement should
be made an exhibit to those minutes.
We require share certificate books for both Aurora and Mavety.
After the supplementary letters patent have been obtained the
following convertible notes and common shares are to be issued.
Convertible
Name Notes Number of Shares
Reg Palmer $10,000.00
Elizabeth E. Palmer 25 common shares
Katherine E. Little John 25 common shares
Jane Anne Palmer 25 common shares
James A. Palmer 25 common shares
Granite Investments & Develop-
ment Limited $10,000.00 100 common shares
British Mortgage & Trust Com-
pany $60,000.00 1 ,000 common shares
Carman G. King $ 6,000.00 150 common shares
$ 6,000.00 200 common shares
$ 8,000.00 350 common shares
Ann P. Gregory 250 common shares
Annett Partners Ltd 250 common shares
The original intention was to sell stock in $12,000.00 units, made up
of 1— $10,000.00 note and 100 n.p.v. common shares for $20.00 each.
You will note that the units being purchased by British Mortgage & Trust
Company do not correspond to that formula nor do the purchases of
Ann P. Gregory and Annett Partners Limited. Would you kindly confirm
the instructions we received in this regard, with Harry Wagman.
And that for the time being appears to be that."
There are no payments from the Solomon & Samuel trust account
at or about December 14 related directly to money received for shares,
but, on December 16, Carl Solomon drew a cheque on it4 repaying to
Aurora the $50,000 received on October 16 from Corporate Plan Leas-
ing and used by him to purchase the shares belonging to Meckler and
Lazar on behalf of Morgan. The amount deposited for the purchase of
shares by December 12 totalled $58,000. The additional $8,000 co-
incides with the payment to Chartered Management Consultants which
has been noticed above. The conclusion that Solomon & Samuel were
short in their trust account in the sum of $50,000 which should have
been held for Aurora during this two month period is inescapable. Here
'Exhibit 975.
159
Three Acquisitions
is what Carl Solomon had to say on the subject when he testified before
die Commission on March 15, 1966:5
"Q. So the position, I take it, is that you received the $50,000.00 from
Corporate Plan Leasing, and you hold that for the benefit of Aurora.
Would that be correct?
A. Yes, sir.
Q. And you pay that sum of money out for the benefit of Mr. Morgan
as purchaser for Messrs. Meckler and Lazar. Is that correct?
A. Yes, sir.
Q. On whose instructions did you do that, Mr. Solomon?
A. On the instructions of Mr. Morgan, Mr. Shepherd.
Q. Why did you conceive that Mr. Morgan was entitied to give you
instructions to pay monies, the property of Aurora, out of your account,
for his benefit?
A. Because he effectively controlled Aurora Leasing Corporation Lim-
ited, Mr. Shepherd.
Q. Would you agree that he was not an officer or director of the com-
pany?
A. That is correct, sir.
Q. You were the President of the company. Is that correct?
A. That is correct, sir, yes sir.
Q. He was not a registered shareholder of the company?
A. That is also correct, sir.
Q. But I take it that the shares which you held, you held for Mr.
Morgan?
A. Yes, sir.
Q. Is there any other reason why you considered Mr. Morgan to be
entitled to give instructions on behalf of Aurora?
A. In effect, I think that Mr. Morgan was manager of Aurora. He was
running the affairs of Aurora. As far as I knew, everyone was looking
to Mr. Morgan for information of Aurora.
Q. You say then that your position is whatever may have been Mr.
Morgan's relationship to Aurora, in law, you conceive that de facto he
was the person in charge of the conduct of its affairs?
A. That is a fair statement, sir.
Q. I am proposing to leave this point now, Mr. Solomon, unless there is
anything more on the issue of the receipt of the money for the benefit of
"Evidence Volume 10, pp. 1229-33.
160
Chapter V
Aurora, and the payment of that money out for the benefit of Mr.
Morgan that you would wish to say, or anything that I have overlooked?
A. I have nothing further to say, Mr. Shepherd.
Q. Then according to the records of your firm, Exhibit 692, you repaid
$50,000.00 to Aurora on the 16th of December. Is that not correct?
Perhaps I can assist you to find the entry, Mr. Solomon, and I can locate
it here. Is that correct?
A. That is correct, sir.
Q. So you restore Aurora's position on the 16th of December?
A. It would appear to be so, sir.
Q. Now what is the position between the 1 6th of October and the 1 6th
of December? Who owes Aurora $50,000.00?
A. It would appear that if $50,000.00 was paid out by Aurora, for Mr.
Morgan, then Mr. Morgan would owe Aurora $50,000.00.
Q. But is the position not that $50,000.00 is paid out by you for the
benefit of Mr. Morgan on the 16th or 17th October?
A. That is correct.
Q. Then where is the money between the 16th or 17th of October and
the 16th of December. Where is Aurora's $50,000.00?
A. I am not sure I am following your question, Mr. Shepherd.
Q. May I put it this way. Is the position not that Mr. Morgan presum-
ably owes you $50,000.00, as solicitor for Aurora, and you owe Aurora
$50,000.00 between the 16th of October and 16th of December?
A. No sir.
Q. What do you say the position then is?
A. Well, as I analyze the position it was I was instructed and directed
to take monies deposited to the credit of Aurora's account and pay it to
Mr. Morgan, at the direction of Mr. Morgan. That was the end of that
transaction, and thereafter that was a washout transaction.
Q. Then is your position that Aurora ought to have recorded that Mr.
Morgan owed $50,000.00 to Aurora, and not yourself owing $50,000.00?
A. That is correct, sir.
Q. Would you take from me that in fact it appeared in evidence yester-
day, Aurora recorded that money as being owing from you?
A. I accept that as being correct, yes sir.
Q. Your position is simply that that is not so, because Mr. Morgan gave
you contrary instructions?
A. Emphatically."
If allowances are to be made for Solomon's inexperience and for
the difficulty encountered by a young lawyer laying down the law on the
161
Three Acquisitions
use of trust funds to this captain of industry, it is impossible to justify the
position taken by him when he was five years older and presumably
wiser.
Distribution through the Trio Account
The next distribution of shares and notes took place through the
Trio account and is illustrated by Table 29. * The terminal date of May
10, 1961 has been selected because a handwritten list of Aurora share-
holders as of that date was found in the back of one of the company's
share certificate books.2 All of the amounts went directly into the Trio
account except for the subscription of L. W. Spencer which reached
it through the Solomon & Samuel trust account as indicated in Note 1.
Notes in the amount of $60,000 and 600 shares issued for $12,000 were
issued between December 31, 1960 and April 25, 1961, and an odd
amount of $192.84, attributed to accrued interest and some additional
shares of N.G.K. Investments, makes the total deposited in the Trio
account during the period $72,192.84. Thus, at May 10, Walton, Wag-
man and Solomon, the last for Morgan, held 1,500 of the issued
shares which on the handwritten list they are shown as holding
jointly,3 and, although registered at the time in the proportions of 700
to Walton, 700 to Wagman and 100 to Solomon, were ultimately, by the
end of the following year, registered in the proportions of 500 each,
authorized by a minute of the board of directors dated September 27,
1961. Further confirmation of the beneficial position of C. P. Morgan
is to be found in a typewritten document4 one copy of which was seized
by the special investigators of the Department of National Revenue in
Wagman's office and another in Walton's house. It is dated August 3 1 ,
1962 and it is reproduced as Table 30, but it will be noted that it is
headed "C. P. Morgan, Wm. L. Walton and H. Wagman, Statement of
Investments as at August 31, 1962" and shows 1,500 shares of Aurora
Leasing Corporation Limited in ihe list of shares held in public com-
panies and to which a price of $ 1 0 per share is attributed. Aurora did
not in fact become a public company until December 17, 1962 when,
by supplementary letters patent issued by the Secretary of State of
Canada,5 the original letters patent were amended to this effect, at the
same time converting the 450 preference shares originally authorized to
975,000 common shares to be added to the 25,000 authorized common
shares, with the proviso that the aggregate of the common shares should
not be issued for a total of more than $1,000,000. To summarize the
shareholding position within Aurora Leasing, a list of the principal share-
exhibit 976.
'Exhibit 605.
•Exhibit 977.
'Exhibit 863.
•Exhibit 370.
162
Chapter V
holders as at May 10, 1961 and April 14, 1965 shows the following
comparison:6
May 10, April 14,
1961 1965
British Mortgage & Trust Company 1,000 22,500
W. P. Gregory 500 21,267
Carman G. King 700 10,814
Steinhart Holdings Limited 400 7,600
C. M. Solomon 100 6,800
William L. Walton 700 7,000
H. Wagman 700 7,000
Clarence M. Fines — 11,366
McConnell Securities — 4,000
Others 900 25,320
5,000 123,667
The increase is explained by the fact that 23,667 shares were issued on
conversion of some of the convertible notes prior to April 14, 1965 and
that on May 9, 1963 the shares were split 10-for-l and an additional
50,000 shares issued. The shareholders described as "others" held
small amounts and were some thirty in number. It will be seen that
British Mortgage & Trust Company is the largest shareholder at both
dates and that by April 14, 1965 W. P. Gregory personally held almost
as many as his own company. Clarence M. Fines, a former Provincial
Treasurer of the Province of Saskatchewan, and Carman G. King have
a substantial investment, and the holdings of the Trio have proportion-
ately declined.
The Aurora Notes
The authorization of the issue of convertible notes by the directors
of Aurora on December 1, 1960 has already been referred to and, as
indicated above, and in accordance with the financial statement of
December 31, 1960, a first issue of $300,000 had been made by the end
of that year. Of these, as has been seen, $150,000 worth were issued
through the Solomon and Samuel trust account, and $90,000 worth to
Valley Music Company Limited, leaving $60,000 worth issued to others.
Of the $150,000 received by Solomon & Samuel in trust they were com-
mitted to pay on Aurora's behaif a total of $150,562.43. They did pay
in respect of shareholders loans $111,131, including $11,000 of the
$25,000 deposited with them by Morgan and from the Trio account,
the deduction of which would leave a balance of $ 1 00, 131 paid by them
on Aurora's behalf. Thereafter they paid the Smith, Winston & Co. fee of
$4,211.13, interest on the loan from Commodore Sales Acceptance of
•Exhibit 978.
163
Three Acquisitions
$983 and Lang, Michener & Co.'s bill of $1,237.30, and they were com-
mitted to pay, although they did not do so, a Meckler and Lazar debt
of $44,000. The sum of these amounts is $150,562.43. In connection
with the payment to Meckler and Lazar, made from the Trio account, it
will be recalled that by December 30, 1960 Solomon had paid from his
trust account to the Trio account somewhat over $97,000.
The remaining $60,000 of notes not hitherto accounted for on the
first issue were paid for by a cheque dated December 30, 1960 in the
amount of $48,437.57, drawn on the Trio account in favour of Aurora
Leasing Corporation.1 This cheque is also referred to in the hand-
written document called "Account of 3" mentioned above,2 with the
notation "Aurora Leasing, re $300,000 note". If the amount of this
cheque is added to the $11,000 held in the Solomon & Samuel trust
account as part of the Trio's $25,000 and transferred to the general
account for payments on behalf of Aurora, the total is $59,437.57. By
adding this to the $150,562.43 paid out by Solomon & Samuel the
total is exactly $210,000, which accounts for all the notes of the first
issue other than the $90,000 of notes going to Valley Music Company.
One of the payments made by Solomon & Samuel to William L. Wal-
ton in trust, that of $24,040 by L. W. Spencer for which he received
$20,000 of Aurora notes and shares of Aurora and N.G.K. Investments,
has already been remarked and had the effect of reducing the notehold-
ings of Morgan, Walton and Wagman from $60,000 to $40,000, so that
by the end of the year 1960 the apparent position was that members of
the public had $170,000 of notes, Valley Music Company $90,000 and
the Trio $40,000.
The Trio and Valley Music Company's Aurora Notes
Although this is clearly the effect of the issues of notes and the
payments in respect of them, there is evidence to show that Morgan,
Walton and Wagman treated $50,000 worth of the Valley Music notes
as their own. This consists of a handwritten memorandum among the
seizures made from Wagman's office1 as to interest payable on January
3, 1961, and shows opposite the word "Trio" the figure "40,000" as one
might expect. Opposite an entry for Valley Music Company Limited
is "90,000" which is broken down into "50,000" and "40,000", with
"326.02" opposite the 50,000 and "260.82" opposite the 40,000, these
figures being then added together and divided in three, giving amounts
of $195.61, $195.62 and $195.61 which are the same as those paid to
Walton, Wagman and Morgan at the January 3 interest date. The pay-
ments are made by cheques2 drawn by Aurora in favour of the three
Exhibit 804.
•Exhibit 868.
Exhibit 874.
•Exhibit 871.
I
Chapter V
individuals, with the exception of that to Walton which is made payable
to the order of AJ.C. Investments Limited, a company which Walton
denied on oath knowing anything about. Further corroboration of this
treatment by the Trio of $50,000 worth of the Valley Music notes as
their own is provided by the note register books of Aurora which record
that $30,000 of notes are issued to each of them, and since it has been
established that they must only have had $40,000 worth at this point
the additional $50,000 must of necessity be those of Valley Music.
Again reference must be made to the activities of the Trio account in
the Guaranty Trust Company to discover how this $90,000 of notes was
disposed of. The record of sales of shares and notes handled through
this account on December 14, 1960 to May 10, 1961 in Table 29 shows,
in addition to the sale of a $20,000 note to L. W. Spencer, eight sales
to other members of the public of notes to the value of $5,000 each
made between March 13 and April 25, 1961. These dispose of the
$40,000 worth of notes legitimately held by the Trio after the sale to
Spencer at the end of 1960. Since the Trio were treating $50,000 of
the Valley Music notes as their own, the balance of $40,000 of notes
provided to Valley Music by the agreement with Aurora must be located,
and it is found that a note in this amount was issued to Atlantic Accep-
tance, and interest in the amount of $260.82 paid thereon at January 3,
1961 by a cheque particulars of which read "re George Blacklock".
Thus is explained that paragraph in Morgan's letter to Davidson of
December 16, 1960 quoted above and beginning: "As additional secur-
ity to our leasing loan to Blacklock the enclosed interim certificate is
to be held by us".
Looking again at the share and note subscriptions handled through
the Trio account between May 10 and June 16, 1961 shown on Table
31,3 there is to be seen a total of $90,000 worth sold to W. H. Wallace
in respect of $15,000, R. Roch of $5,000, Dr. Keith Burwell of $15,000,
and J. J. Richardson for Dorothy Richardson of $15,000, with various
subscriptions made through Aurora in the amount of $40,000, for which
the sum deposited in the Trio account was $86,407.27, the difference
being attributable to accrued interest and discount. An example of these
transactions is provided by a letter from Vancouver dated May 25, 1961,
addressed to Mr. C. Powell Morgan and signed W. Keith Burwell,
M.D.,4 and the paragraph quoted below is not only interesting as such
but indicates somewhat more knowledge of what was going on by W. H.
Wallace, a director of Atlantic, than he was prepared to admit to the
Commission:
"You will recall a telephone conversation with my friend. Bill Wallace,
last Friday afternoon at which time he said I was in his office and was
interested in taking a position with the AURORA LEASING CO. LTD.;
•Exhibit 979.
'Exhibit 980.
165
Three Acquisitions
which was to be to the amount of $15,000 par, at 95 of the 7% con-
vertible notes of this company. The letter of application was to be ad-
dressed to you, and the cheque made payable to W. L. Walton (In
Trust). My personal cheque, #35, is enclosed to the amount of
$14,250, and obviously they are for me personally rather than my Van-
Bur Company. Naturally I hope we will have as satisfactory a perform-
ance as we had with COMMODORE SALES".
It will be recalled that only ten days previously the final acquisition
of the interest of the minority shareholders in Commodore Sales Accep-
tance had been completed.
The situation now produced is one which requires close analysis.
The holdings of the Trio of Morgan, Walton and Wagman had been
reduced by the subscriptions for notes filled between December 14, 1960
and May 10, 1961 to $40,000.5 The subscriptions of W. H. Wallace,
R. Roch, Dr. Burwell and Dorothy Richardson accounted for another
$50,000 at face value for which the Trio account had received that
much, less $1,592.73 in respect of accrued interest and discount. There
remains the item entitled "Various Subscriptions made through Aurora"
in respect of which on May 29, 1961 $38,000 was deposited in the Trio
account, attributable to notes to the value of $40,000. All the other notes
having been accounted for at this point, the subscriptions could only have
been filled by having available the $40,000 worth issued to Atlantic
Acceptance, and indeed on May 29 a certificate in respect of this amount
was back in the hands of Aurora in cancelled form, the notation on it
being "replaced by certificate No. 59 May 26, certificate No. 60 June 1
and certificate No. 61 June 16". Certificate No. 60 was in fact issued
to Dr. Burwell in the amount of $15,000 and certificate No. 61 for the
same amount to Dorothy Richardson. Certificate No. 59 was issued to
Granite Investment in the principal amount of $10,000 for which the
purchaser paid Aurora Leasing the sum of $9,500 by cheque, dated
May 25 and signed by R. A. Palmer.6 The cheque is endorsed by
Aurora for deposit to its own account.
On May 26, 1961 Aurora made its second issue of notes, apparently
in the principal amount of $340,000, but after the issue was complete
the total notes outstanding amounted to $600,000 and not $640,000,
as interest payments made by the company in September 1961 confirm
and do not provide for any payments being made to Morgan, Walton
or Wagman or to Atlantic Acceptance who are not then recorded as
noteholders. The issue is illustrated on Table 327 where it will be noted
that the $9,500 subscription made by Granite Investments is included
in respect of a note with a par value of $10,000. Only some of the
Table 29.
•Exhibit 982.
'Exhibit 983.
166
Chapter V
subscribers get their notes at a discount, viz., Dorothy Martin, British
Mortgage & Trust Company, A. T. Christie, Granite Investments and
Annett Partners. The paid subscriptions amounted in all to $333,750 in
respect of $340,000 worth of notes, and the only possible explanation
is that the new noteholders received $10,000 worth of the Atlantic note
for $40,000 with $30,000 from the holdings of Morgan, Walton and
Wagman, thus including in the second issue $40,000 worth of notes
already outstanding. Based on a sale of $300,000 of notes with the
appropriate discount of $4,250, Aurora should only have had on its
books subscriptions in the amount of $295,750, so the excess amount
was paid to W. L. Walton and deposited in the Trio account on May 26.
Evidence of the intention to dispose of the note heretofore held by
Atlantic is contained in a release signed by George Blacklock, dated
June 12, in the following terms:8
"This is authorization for Atlantic Acceptance Corporation Limited
to release to W. L. Walton $40,000.00 principal amount of Aurora Leas-
ing Limited Debentures held by them. It is understood that the proceeds
of these debentures, $38,000.00 will be administered by Mr. Walton as
trustee for and on behalf of myself."
On July 19 this $38,000 is paid out by a cheque drawn on the Trio
account9 in favour of Valley Farm and Enterprises Limited, a company,
like Valley Music, associated with the affairs of George Blacklock and
owned by the Trio, about which more will be heard. Of this Atlantic,
which had lost its $40,000 security, received back approximately
$17,000 on account of Blacklock's indebtedness, and the balance was
paid to Blacklock or for his benefit.
The Trio's Profit
A summary of the cash receipts and disbursements of Walton,
Wagman and Morgan in connection with the acquisition of Aurora
Leasing Corporation, recorded in the Solomon & Samuel trust
account and the Trio account No. 13324 in the Guaranty Trust Com-
pany, prepared by Mr. Austin, appears as Table 33. x It shows the cash
received and disbursed by the Trio account and an excess of receipts
over disbursements of $97,272.65. This excess is analysed following
the listing of receipts and disbursements and it will be noted that, since
the payment to Lavan Trust transpired only in 1964, according to the
evidence of Carl Solomon, in the amount of $15,000, and on the assump-
tion that this was Trio money, a deduction should be made in that
amount leaving a balance of $82,272.65. The payment of $8,000 by
"Exhibit 984.
'Exhibit 985.
Exhibit 986.
167
Three Acquisitions
Solomon & Samuel on behalf of Aurora to Chartered Management
Consultants has not been included but, since that company was owned
by Morgan, Walton and Wagman, it should be credited to the excess,
leaving a balance of $90,272.65.
In addition to this large amount of money which went into the
pockets of Morgan, Walton and Wagman, these three men had acquired
30% of the issued capital stock of Aurora, as at May 10, 1961, without
cost to themselves. Moreover Valley Music Company never paid its
debt to Aurora. In 1963 the latter sold the coin-operated equipment
purchased from Valley Music to a company called Ottawa Valley
Amusements Limited, an enterprise of George Blacklock's brother Neil,
for $105,000. If Aurora had recorded the allowable depreciation on
the valuation of $300,000 made in relation to these assets at the time
of the purchase from Valley Music, they would have had a book value
of approximately $155,000, and Aurora's loss would have accord-
ingly been some $50,000 on this transaction. At the time of Aurora's
bankruptcy on July 30, 1965 the debt of Ottawa Valley Amusements
amounted to $118,344, an additional amount being attributable to
accrued interest.
Evidence of W. L. Walton
The bewildering detail of this account of the acquisition of Aurora
Leasing Corporation must not be allowed to obscure the enormity of
the whole transaction. Misfeasance, malfeasance and breach of trust
on the part of C. P. Morgan, W. L. Walton, Harry Wagman and Carl
M. Solomon are everywhere evident. Walton's evidence, when it emerges
from behind the shield of a lost memory, is of little assistance. He recalled
having an interest in Aurora and being a director of the company. He
identified the documents put to him which were in his own handwriting
and those to which his signature had been appended, including entries
in the Trio account passbook which he had made, but he maintained
that he could not remember why these things had been done. He dis-
claimed any knowledge of the transaction between Aurora and Cor-
porate Plan Leasing or of that between Aurora and Valley Music, but
readily agreed that things must have been done by him when documen-
tary evidence of his performance in the matter was presented to him.
So that the difficulties of counsel may be appreciated some excerpts from
Walton's evidence can be usefully quoted:1
"Q. Do you recall having any discussion with Mr. Morgan or with Mr.
Wagman about Aurora purchasing the assets of Valley Music Company
Limited?
A. No, I don't recall any discussion.
Evidence Volume 81, pp. 10880-1.
168
Chapter V
Q. Just to sum up before we start into it, as I understand it, you do
not recall the company, Aurora, entering into an agreement to purchase
assets of Valley Music, you do not recall any such transaction in fact
taking place, and you do not recall personally being involved in the
completion of any such transaction or of having had any conversation
with Mr. Morgan or Mr. Wagman relating thereto; is that correct?
A. That is correct.
Q. Did you have any conversations, according to your memory, with
anybody at all relating to the purchase of Valley Music by Aurora?
A. No, sir.
Q. And I take it your mind is a complete blank on the subject of the
purchase of assets of Valley Music by Aurora; is that correct?
A. That is correct, sir.
MR. SHEPHERD: In the light of this, Mr. Commissioner, I will require
a substantial number of exhibits."
Then after a brief adjournment, the examination resumed:2
"MR. SHEPHERD: I had already shown you, Mr. Walton, the min-
utes of Aurora in which there is a reference to an intended purchase
of Valley Music assets by Aurora, of which latter company you were a
director. I now show you Exhibit 946, which is dated the 23rd of
November, 1960, made between Valley Music Company Limited and
Aurora Leasing Corporation Limited, signed on behalf of Aurora by
Mr. Wagman and Mr. Solomon and signed on behalf of Valley Music
Company by Mr. Blacklock, which provides, in part, that Valley Music
Company Limited is indebted to Traders Finance Corporation Limited
in the amount of $64,000, to Laniel Amusements Inc. in the amount of
$14,000, and Atlantic Acceptance Corporation Limited in the amount
of $129,000.
A. Yes.
Q. I think you have already told me, but I will ask you again: were you
then familiar with the fact that this transaction was being entered into?
A. No, I wasn't familiar with it at the time.
Q. When did you first become aware that such a transaction was being
entered into?
A. I believe when Mr. Morgan sent over a cheque to the office to pay
off some of the debts that were assumed.
Q. I understood you to say just before lunch, Mr. Walton, that you had
not had any conversation with anybody at all about an intended purchase
or a purchase which had happened of these assets. Did you not say that?
A. Well, I didn't see this document and so on.
'Evidence Volume 81, pp. 10885-7.
169
Three Acquisitions
Q. I see. With the assistance of the document, then, you now recall that
such a transaction did take place?
A. Oh, yes.
Q. Yes.
A. After it took place I knew."
The use of his trust account was then put to the witness and the
payments from it of the debts of Valley Music specifically referred to.
The only variation of the stock answer that he could not recall why
things were done came when it was pointed out to him that moneys had
been retained in his trust account for which he was accountable to
Aurora; whereupon he answered that this was done at the direction of
C. P. Morgan. A final example of Walton's general thesis was as
follows:3
"Q. After you had paid those debts in full and releases for them had
been issued, there remained in your hands a figure of something in excess
of $39,000. Of that amount you paid out $25,000 pursuant to the direc-
tion of Mr. Blacklock, and you took the balance and paid it into what
has been referred to as the "Trio account". Does that not appear to be
what occurred?
A. Yes, it does.
Q. Mr. Walton, it would appear on the surface, in default of some ex-
planation, that that money which was paid into the Trio account was
the property of Aurora Leasing Corporation Limited, and I wonder if
you could assist the Commission as to how this payment came to be
paid?
A. Payment made to whom?
Q. Into the Trio account. Why was it paid there rather than paid back
to Aurora?
A. Well, as I mentioned earlier, it would have been on Mr. Morgan's
direction, Mr. Shepherd.
Q. Mr. Morgan, Mr. Walton, was not a director or officer of Aurora
Leasing, was he? Indeed, so far as the registered share records were
concerned, he wasn't even a shareholder, although I will agree that
shares were being held for him beneficially by Mr. Solomon.
A. Well, I always thought that Mr. Morgan was an officer and director;
he ran the company. All the money that went into the company was on
his direction.
Q. You were a director of the company?
A. Yes, I was a director as well.
Q. And Mr. Wagman was a director?
A. Yes.
3Evidence Volume 81, pp. 10895-7.
170
i
Chapter V
Q. And Mr. Solomon?
A. Yes.
Q. Did you think Mr. Morgan was a director of the company?
A. Well, perhaps Mr. Solomon may have been acting for Mr. Morgan,
but I know Mr. Morgan managed the company. He directed its opera-
tion.
Q. May I take it, then, that your explanation for this payment of funds
into the Trio account, 13324, is that Mr. Morgan told you to pay it into
that account? Is that correct?
A. That is correct, sir.
Q. And will you please take it from me that accountants have already
testified before this Commission that that sum was not repaid to Aurora
at any time? Do you recall it being repaid to Aurora?
A. I couldn't recall, sir.
Q. When Mr. Morgan told you to pay this money, Mr. Walton, being
the amount left over after the settlement of Aurora debts, into an account
in which Mr. Morgan had an interest, did you consider that to be an
honest transaction?
A. As I mentioned earlier, I didn't doubt the man at all. I never thought
to question as to why he did these things.
Q. Do you consider it to have been an honest transaction now?
A. I don't know how to describe what was in Mr. Morgan's mind.
Q. I was endeavouring, really, to obtain your own view, Mr. Walton,
that is, what was in your mind?
A. I don't think I can pass an opinion on that, sir.
Q. Is there any other explanation —
THE COMMISSIONER: Mr. Walton, you were then a chartered
accountant and, I believe, a licensed trustee in bankruptcy, and you were
professionally qualified, I think, to hold an opinion on this particular
point. You say, as a chartered accountant and as a licensed trustee in
bankruptcy, that at that time and now you have no opinion as to the
honesty of that transaction?
A. I don't know what to say."
Finally, as to the operation of the Trio account it would appear
from Walton's evidence that when he was not obeying the dictates of
C. P. Morgan his hand was being guided by that of Harry Wagman.
Wagman's Evidence on the Trio Account
Wagman in his evidence1 denied that Walton's actions in the
Trio account and in connection with joint investments of himself,
Evidence Volume 82.
171
Three Acquisitions
Wagman and Morgan were done at his dictation, but maintained gener-
ally that Morgan had complete control over both of them. Morgan's first
employment of account No. 13324, which had been used to handle joint
investments of Walton and Wagman hitherto, had been, according to
Wagman's evidence, on the occasion of the John Belli transactions in
June 1960. About the origin of this he said, "to the best of my recol-
lection, knowing Mr. Morgan and how he was doing things, this transac-
tion between Atlantic and Belli was discussed by themselves and for
some reason that I could not explain he came over to our office and
asked, I think it was Mr. Walton if there was a trust account or some
account that he could transact, put this thing through, and issue the
cheques out of". He said further that realizing that Morgan's use of the
account was going to create problems, on April 27, 1961 and not before,
he closed out the account with respect to matters in which he and
Walton were jointly interested by a withdrawal of $2,580.40. As to the
subsequent nature of transactions in the account Wagman should be
heard in extenso:2
"Q. As at 27th April, 1961, you made the appropriate adjustment and
withdrawal of funds so that those funds in that account, which were
solely the property of Mr. Walton and yourself, were withdrawn and
after that date there were no moneys in the account other than moneys
in which Mr. Morgan had an interest; is that correct?
A. Yes, sir.
Q. And is it sometimes referred to by Mr. Walton in his handwritten
working papers as the Trio account?
A. Yes.
Q. Who are the members of the Trio?
A. Well, I would imagine he meant Mr. Morgan, himself and myself.
Q. Mr. Morgan was never a person entitled to sign cheques on that
account, was he?
A. No, sir.
Q. Why did you consider that Mr. Morgan wished to deposit funds in
which he had some interest in an account which stood in the names of
others and over which he had no signing authority?
A. Why?
Q. Yes.
A. Outside of trust, there is no other reason. It was never discussed and
it was never asked that he sign cheques. We would have been glad to
give him the opportunity to do so.
Q. Were you concerned about the surreptitious nature of this course of
dealing?
A. No.
•Evidence Volume 82, pp. 11013-9.
172
Chapter V
Q. Did it awaken in your mind any sense of uneasiness about Mr.
Morgan's honesty?
A. No, sir.
Q. At any time did you have any sense of uneasiness about Mr. Mor-
gan's honesty?
A. No, sir.
Q. Were there any documents in existence whereby you and Mr. Walton
or either of you declared that Mr. Morgan was entitled to a share in the
proceeds of this account?
A. No, sir.
Q. It was all done orally?
A. Yes, sir.
Q. Was the share in the Trio account, after April 1961, one-third each?
A. No, sir.
Q. I'm sorry, I didn't hear you.
A. No, sir.
Q. What was the share?
A. There was no designated share at any time saying that each one of
us had a third. It was never discussed. Whatever Mr. Morgan wanted
to do with the funds in that account would have been done.
Q. I suppose it would be fair to observe that, as a matter of law, what-
ever you or Mr. Walton wished to do with the account would have been
done because you were the only persons who could sign a cheque; is
that not correct?
A. Yes. We could have done that, yes.
Q. Would you be good enough to expand further upon the degree to
which Mr. Morgan had control over an account which was not in his
name and on which he could not sign a cheque?
A. Well, he knew I would not sign a cheque without his direction or at
his direction and it was a case of utmost trust and I never did sign a
cheque without his knowledge or without his direction and he was satis-
fied to go along with that. He could have signed the account all by
himself if he wanted to.
Q. I'm sorry. He could have?
A. If he wanted to take over the sole signing of this account he could
have had it, too.
Q. He could have had it in the sense that had he asked you to write a
cheque for the whole sum and pay it to him you would have done so;
is that correct?
A. Absolutely.
173
Three Acquisitions
Q. Did you and Mr. Walton have any interest in the funds in that
account?
A. Only what Mr. Morgan gave to us.
Q. Did Mr. Morgan indicate to you what it was that he was going to
give to you or authorize to take?
A. No, he never, in advance or anything. He just said, 'Do this today'
and that was all.
Q. Then is it your position that the funds in that account stood, as a
matter of law, under the control of yourself and Mr. Walton but, as a
matter of unspoken arrangement between the three of you, they were
really at Mr. Morgan's disposal?
A. Yes, sir.
Q. Did you expect any part of the balance in that account?
A. No, sir, never.
Q. Did Mr. Walton expect, as far as you are able to determine from
your conversations with him, to receive any part of those moneys?
A. No, I don't think Mr. Walton expected anything more than I did.
Q. Then really you are saying this is Mr. Morgan's account, aren't you?
A. That's right.
Q. If you are saying it is Mr. Morgan's account, why do both you and
Mr. Walton always refer to it as the Trio account or account of three?
MR. MacKINNON: With respect, Mr. Commissioner, I don't believe
this witness called it the Trio account.
MR. SHEPHERD: Let me rephrase it, Mr. Commissioner. I think
Mr. MacKinnon is quite correct. Why did Mr. Walton refer to it as the
Trio account and you refer to the account as the account of three in your
working papers?
A. Well, I don't know why Mr. Walton referred to it as a Trio and there
was no reason for me to just put down the account of three. I had to
name it something. I was calling it 13324 and I don't know just how
this came about, the account of three or Trio, but it actually had no
meaning, and there was no reason why that was attached to it.
Q. It was a singular thing to do, was it not, to ascribe the name 'Account
of three' to an account which on its face was an account of two but, as
you assert, was really an account of one, Mr. Morgan's?
A. Well, by him having control of this account, it was at his disposal.
Q. Well, Mr. Wagman, have you had an opportunity now to make full
explanation of the existence of this account — and we will be dealing with
particular deposits and withdrawals — the existence of this account in
your name and Mr. Walton's name and Mr. Morgan's association with
it? Is there anything else you wish to add on the point?
174
Chapter V
A. No, nothing too much more to add. But looking through some of
these entries in here, there was cheques that were issued to companies
that I had no knowledge of and it says 'C.P.M. re M.L.M.' which is
Mildred Morgan for $10,000. He told me to issue it out of there. We
issued it out of there. And West World, I don't know what these were.
He told me or Mr. Walton to issue and we issued them. It indicates
the control he had. We didn't say, 'We don't want to do it' or any
reason for it.
Q. When Mr. Morgan wished to take some part of the funds out of the
account for his personal benefit you readily acceded to that request?
A. Yes.
Q. Do you assert that the fact that Mr. Morgan was permitted to
withdraw for his personal account and benefit sums in the order of
$10,000 and the like shows that the whole of the account was Mr.
Morgan's instead of just a third of it?
A. Well, it could have been. If he wanted everything to go to him, it
would have gone to him.
Q. Mr. Wagman, with all respect, in that sense it could have been
the property of the Community Chest in that you could have written
a cheque to them, I suppose, if you wanted but the control of it was
yours?
A. That's right."
The account was closed out on December 2, 1963, as a result of
the interest shown in the affairs of W. L. Walton by the Department of
National Revenue out of which, as has been mentioned before, a prose-
cution and conviction followed, and here again Harry Wagman must
be allowed to speak.3
"Q. Yes, when that account was closed out, Mr. Wagman, I put it to
you it was done by two cheques, one on the 29th of November and one
on the 2nd of December. The cheque on the 2nd of December, which
reduced the balance to zero, was $51,495.89, and that cheque has been
traced to Guaranty Trust, where it was used to discharge a loan which
that company had theretofore made and which stood in the name of
yourself and Mr. Walton, as I recall it. Do you remember that
transaction?
A. I don't know whether it was in my name or Mr. Walton's.
Q. Perhaps it was in Mr. Walton's name, but the money was used to
pay off a loan?
A. That is what Mr. Walton said yesterday.
Q. I call to your attention the immediately preceding entry, a with-
drawal of $26,722.70.
A. A deposit, I think.
'Evidence Volume 82, pp. 11032-4.
175
Three Acquisitions
Q. I beg your pardon — I said a withdrawal.
A. That is a deposit.
Q. That is a deposit necessary to make up the sum which was paid
out to discharge that loan; is that correct?
A. That is right.
Q. And that came from C.P.M., H.W. and W.W., one-third each?
A. Yes.
Q. If you had no interest in that account, why would you and Mr.
Morgan and Mr. Walton each pay into that account one-third of the
sum required in order to discharge that loan?
A. I really don't know. I don't know where that money came from. I
have no explanation for that.
Q. Your handwritten note indicates that it came as to one-third from
each of you three, does it not?
A. Yes.
Q. It says 'C.P.M., H.W. and W.W. one-third each'?
A. Yes.
Q. You can't assist us further in this connection?
A. No, I can't.
Q. Is your mind a blank on it?
A. Yes, I couldn't at all recollect where that came from. You see,
I didn't particularly go through this here all by myself. I have got
cancelled cheques, and I went over these things with, I believe, both
Mr. Walton and Mr. Morgan, but I can't recollect at all where this
deposit came from.
Q. Since you paid a third of it yourself, according to your notation,
that would indicate that at the time you made that note you must have
satisfied yourself that you paid the third?
A. Well, it may have come out of some source that I might have had
an interest in.
Q. Yes, but you can't help us further on that?
A. No, I am sorry."
After the midday adjournment on November 17, 1966 when Wagman
gave his evidence counsel returned to the matter.4
"MR. SHEPHERD: Mr. Wagman, before leaving the Account No.
13324 I show you Exhibit 807 again. I think you said, did you not,
that it was not the position that each of you owned a third of the
account?
A. It wasn't designated as such.
'Evidence Volume 82, pp. 11037-41.
176
Chapter V
Q. Well, indeed it is not designated as such in the sense that the
account stands in the name of yourself and Mr. Walton. Did I not
understand you to say that there was no arrangement, written, oral
or in practice, entitling each of you to one-third of the proceeds of the
account?
A. That's right.
Q. I direct your attention to a withdrawal on the 7th November, 1961,
of $60,000. Could you look at the bank account and assist me as to
the person for whose benefit that withdrawal was made?
A. My notation is Mr. Morgan, Mr. Walton and myself.
Q. I show you Exhibit 806, a cheque book containing stubs on which
notations are written in some instances such as the name of the person
receiving the cheque. Is that in your handwriting, and I refer to the
stub for cheque 124?
A. No, it is not.
Q. Whose handwriting is that?
A. Mr. Walton's.
Q. That says that it is payable to Messrs. Morgan, Walton and Wagman;
is that correct?
A. Yes.
Q. In the bankbook, Exhibit 807, is that your handwriting?
A. Yes, this is mine.
Q. That says 'C.P.M.— W.L.W. and H.W.' Is that correct?
A. Yes.
Q. For what purpose was a withdrawal of $60,000 made to the credit
of you three?
A. I don't recall for what purpose it was withdrawn.
Q. Do you remember the withdrawal taking place at all?
A. Well, when I see this here now I remember it was done.
Q. Apart from seeing a written notation of the fact that there was such
a withdrawal do you recall it being made?
A. I believe so.
Q. What did you do with your share?
A. I don't think it was split or I got $20,000.
Q. What was done with it?
A. I cannot recall just where that went.
Q. It is a significant sum of money, is it not?
A. Yes, it is.
177
Three Acquisitions
Q. I don't wish to press you unduly on the matter, Mr. Wagman, but
will you not agree that it is uncommon for one to fail wholly to
remember what is done with such a sizeable sum?
A. I cannot tell you what was done because, as I say, I do not remember
but it could possibly have gone to retire some bank loans, but I do not
know.
Q. In any event, do you agree that it was for the benefit of the three
of you?
A. I would think so.
Q. In equal shares?
A. I would think so.
Q. Then I direct your attention to the entries in the book of the 31st
May and the 5th June, 1961. It is a cheque to C. P. Morgan on the
29th May, 1961, for $8,333.33, out of this Trio Account, and a
second cheque of the 29th May to William L. Walton and H. Wagman,
$16,666.67. Have you found the entry?
A. Yes.
Q. This appears to be another instance of payment coming out of that
account in equal shares, does it not?
A. Yes, sir.
Q. What was this payment made for?
A. This doesn't help me or tell what that was for.
Q. I thought perhaps your own memory would assist you?
A. It could possibly be to put into investment in another company.
Q. The source of the money which is distributed equally among you is
Account 13324, is it not?
A. Yes.
Q. Do you not agree that this seems to indicate that each of you had a
one-third interest in that account?
A. No. At times there were disbursements which indicates it was a
third but there are many times when it isn't. It was just as Mr. Morgan
directed. It was done that way.
Q. He appears on those two occasions at least to have directed that
withdrawals be made shared equally among the three of you?
A. Yes.
Q. I call your attention to a further entry on the 28th March, 1962, in
the sum of $3,000. Have you found that?
A. Yes, sir.
Q. I think there is perhaps a little more explanation recorded on the
bankbook itself, is there not?
178
Chapter V
A. Yes. This seems to be a cheque that was drawn to cover an overdraft
at the Bank of Commerce.
Q. So it was withdrawn for the credit of the three of you?
A. That would seem so.
Q. In equal shares, one might presume?
A. It would seem so.
Q. And again the source of the money is Account 13324?
A. Yes.
Q. Do you still assert that the three of you did not have a one-third
interest in the proceeds of the account?
A. Yes, sir."
I have endeavoured to give, as did counsel on these occasions, the
fullest explanation from the parties exclusively concerned with what has
been referred to as the Trio account and I have come to the conclusion
that neither W. L. Walton nor Harry Wagman can be believed on any
subject during the protracted evidence which they gave, except as to
admissions against their own individual interests. I do not believe
Walton's evidence about his loss of memory and indeed when the oppor-
tunity to produce medical evidence on this point, from the Dr. Greben
mentioned by him as being his psychiatrist, came on May 30, 1967,
none was tendered. No attempt was made by either of these witnesses to
assist the Commission, all their efforts being directed, perhaps not
unnaturally, toward protecting themselves. Walton was more logical
than Wagman in that he did not attempt to dispute the documented facts.
The position taken by Morgan in the evidence given on oath to the
Commission on May 3, 1966 — when he was aware of the dangerous
character of his illness — was that the Trio account passbook, which he
had never seen, was used by Walton and Wagman for some of the
transactions in which he had a joint interest with them, but he denied
being a beneficial owner of the account as such. In connection with these
transactions he did not balk at the word "partnership". He summed
up his position in answer to a question put by Mr. Shepherd as follows:5
"Q. Do you say that with respect to this account that you and Mr.
Walton and Mr. Wagman were in partnership in a number of transac-
tions and that you were aware that deposits were being made and
cheques were being written into or out of an account of the Guaranty
Trust, but you are not able to say that every deposit and every cheque
written on account No. 13324 relates to affairs of the partnership?
A. Exactly. In other words, any transactions where it was a three-way
deal, where there were cheques handled, it was handled by Mr. Walton
and put through that account or an account in the Guaranty Trust. But
'Evidence Volume 26, p. 3419.
179
Three Acquisitions
I have never seen the account, never got the cheques, never saw the
financial statement that came from the bank and personally had no
signing authority on that account. And in addition, I was under the
impression he was handling it through a trust account."
Unfortunately, among the multitudinous transactions about which
Morgan was questioned on this occasion, with so little time available,
the circumstances surrounding the acquisition of Aurora Leasing Cor-
poration were not put to him and although he was examined by the
trustee-in-bankruptcy of many corporations, the examination scheduled
for the estate of Aurora never took place.
Evidence of C. G. King
Carman G. King gave evidence as to his connection with Aurora
Leasing on December 21, 1966.1 He was a shareholder and noteholder
and became a director on September 28, 1962 when J. C. Laidlaw
became a director and president, and Carl Solomon stepped down from
the presidency to be vice-president. When asked how he came to hear
of Aurora and make the investment in it he answered, "Well, I had made
some considerable capital gains in Atlantic, and I had done the same
thing in Commodore Sales Acceptance, so I had come to think that
Mr. Morgan was a genius, and that this was the way to make money, to
invest in his companies". He recalled being in the western United States
and endeavouring to sell Atlantic notes to some insurance companies
there, when in the course of a telephone conversation with Morgan the
latter told him that he had the chance to buy a leasing company for
$100,000, that this had been offered to Atlantic but the Atlantic board
had decided not to go into the leasing business, and that he was looking
for people to go in with him as shareholders. At this time King bought
700 shares for $20 a share and sent a cheque for $14,000 to Solomon
& Samuel. He had the definite impression that 5,000 shares had been
bought by a group organized by Morgan for $100,000, that he was part
of the group, and that his shares came directly from Meckler and Lazar
or Rashkis. He did not discover that he had bought Morgan's shares
until the final hearings in bankruptcy in 1965. At the time he became
a director, which was shortly before Aurora became a public company,
he understood that it was being managed by Chartered Management
Consultants and paid a fee for this service, although he realized that the
prime movers in that company were "Wagman in conjunction with
Morgan". The financial statements prepared by Walton, Wagman & Co.
showed improvement each year and he apparently made no inquiry
about the lending policy of Aurora or about the source of its funds.
Directors meetings were generally held in the offices of Solomon &
Samuel or Solomon & Singer with, as he recollected, Morgan normally
Evidence Volume 93.
180
Chapter V
present. It was not, according to his evidence, until after the Atlantic
default that King realized Laidlaw, Solomon and Walter Pahn were
Morgan's nominees, and it was only when they declared themselves to
be so at that time in a directors' meeting. King, as he and W. P. Gregory
testified, was mainly interested in getting Aurora shares listed on the
Toronto Stock Exchange, but whenever he made this suggestion Morgan
said that he was "saving it for Atlantic". From this and other indications
King thought "it was the makings of another company like Commodore
Sales Acceptance". Morgan never vouchsafed any explanation why he
was not a shareholder or director of Aurora, and King was not curious;
hence it is difficult to conclude that he did not appreciate the real status
of Laidlaw, Solomon, Canning and Pahn. In the later stages, according to
King, when it was difficult to get hold of Morgan he could invariably
be found in Harry Wagman's office "where he spent a great deal of his
time".
Such is the story of the acquisition for the sole benefit of C. P.
Morgan, W. L. Walton and Harry Wagman of Aurora Leasing Corpor-
ation Limited, a company through which millions of Atlantic money
were lent in either an imprudent or improper manner and frequently
in both, and often indeed to companies in which these three themselves
had an interest. Moreover at the end British Mortgage & Trust Company
had an 18% interest and W. P. Gregory personally a 17% interest
without any representation on the Aurora board, and it will be seen
later how Gregory had virtually tied his own hands by borrowing a
very large amount from the company on his personal account. Subse-
quent portions of this report will be concerned with many of the loans
made by this company with money provided mainly by Atlantic through
Commodore Sales Acceptance in the course of the last four and a half
years of its disastrous history.
Crest Acceptance Corporation Limited
In comparison with the two acquisitions previously dealt with in
this chapter the third was a matter of small moment, but since the com-
pany acquired became one of the Adelaide Street group, and since the
morality of the transaction is entirely consistent with what has already
been exhibited, it must be examined. Crest Acceptance Corporation
Limited was incorporated in Ontario by letters patent on January 31,
1958. The permanent directors after transfer of the incorporators'
shares were A. Joseph Collinson (representing A.J.C. Investments and
181
Three Acquisitions
Holdings Limited), David C. East and Harry Robert Wellman, and the
first auditor of the company was Harvey Kenneth Cooper, C.A. ap-
pointed at a shareholders meeting on July 2, 1958. In the course of the
year substantial purchases of preferred stock were made by a com-
pany called Richards Aluminum and in the spring of 1959 were
assigned as security to United Dominions Corporation (Canada) Lim-
ited. In the latter year Cooper, who had properly ceased to be auditor
when becoming a shareholder, acquired common shares from A.J.C.
Investments, East and Wellman in a manner not particularly relevant,
but, if his evidence is to be believed, as a result of unpaid loans which
eventually gave him absolute ownership of A.J.C. Investments itself. In
any event by November 16, 1959 Cooper, according to the records of
Crest Acceptance,1 became president, his co-directors being Robert
Levine and Shirley Fruitman. Shirley Fruitman was a clerk in the
offices of Walton, Wagman & Co. who had prepared the financial state-
ments of Crest Acceptance for the year ending in February 1960, replac-
ing McDonald, Currie & Co. as auditors. On December 30, 1960 there
was a transfer of 6,970 shares of Crest Acceptance from A.J.C. Invest-
ments to Cooper and on September 18, 1961 the accounts receivable
of the company were sold to United Dominions Corporation for $72,068
accompanied by the redemption of 2,000 of the preferred shares held
by United Dominions Corporation and the transfer to Cooper of the
balance of 17,000 shares on October 12, 1961. The company at that
date had been stripped to its corporate shell and Cooper was looking
for a buyer.
H. K. Cooper Approaches W. L. Walton
Cooper was examined before the Commission by both Mr. Shep-
herd and Mr. Cartwright on March 11, 1966.1 He said that although
Crest Acceptance was without assets it could show losses in the order
of $140,000 to be carried over to subsequent years for income tax
purposes, and his own calculation of the value of the company to a
purchaser was based on 25% or so of the income tax which might be
saved if the company were reactivated and for which he hoped to obtain
a sum of at least $5,000. Upon inquiry among his business acquain-
tances he found little response and many lower offers, until he broached
the subject to W. L. Walton. Cooper was inclined to be evasive about
his knowledge of Walton, but conceded that he did per diem work as
an accountant for Chartered Management Consultants in late 1961
and early 1962. As has been seen, Shirley Fruitman was his co-director
of Crest Acceptance according to that company's records in 1959 and
Walton, Wagman & Co. were its auditors. It is most likely that his
inquiries as to the company's disposal began and ended with Walton
'Exhibit 70.
'Evidence Volume 8.
182
Chapter V
who suggested to him that he might be able to dispose of it for $11,000.
If he did, would Cooper be satisfied with $9,000? To this Cooper agreed.
Cooper's evidence is to the effect that this agreement was reached
in November 1961 and that payment of the $9,000 was made in instal-
ments by Walton from that time until March 1962; this is in part
supported by the deposit book of his account in the Guaranty Trust
Company, No. 15924.2 Walton in his testimony said that the purchase
price was $1 1,000. Cooper admitted that an option agreement had been
drawn between him and Walton and Wagman providing for a payment of
$ 1 1 ,000, but said that he was the only one who had signed it. I was not
impressed with either the coherence or candour of Cooper's evidence as
a whole, but on this point I accept his evidence and reject that of Walton.
In any event Walton spoke to C. P. Morgan about the availability of
the Crest Acceptance shares and the latter eventually indicated his
interest and the willingness of Atlantic Acceptance to acquire them.
Walton thereupon selected a young lawyer by the name of Leonard
Murray Eades, a graduate of 1959, to whom, as he said, he "might have
wanted to give some business", and an agreement was entered into
between Cooper and Eades dated March 8, 1962 for the latter to buy
the issued and outstanding preference shares of Crest Acceptance for
$10,000 and the common shares for $1,000. If the chronology derived
from the face of the document is to be relied on, an agreement was next
prepared by Messrs. Osier, Hoskin & Harcourt, dated March 6, in which
Atlantic Acceptance Corporation agreed to purchase and L. Murray
Eades agreed to sell the outstanding preference and common shares of
Crest Acceptance for a total of $27,000, and to this was annexed a
financial statement for the year ending February 28, 1961 and an interim
financial statement as at October 15, 1961 prepared by Walton, Wag-
man & Co.3 An agreement between William L. Walton, described as
beneficiary, and Leonard Murray Eades, as trustee, reciting the bene-
ficiary's intention to purchase in the name of the trustee the Crest
Acceptance stock, contained a declaration of trust on the part of Eades,
and an agreement to indemnify him in respect of any liability which
he might incur by Walton. This was drawn in the offices of Hubert J.
Stitt, a Toronto lawyer with whom Eades shared accommodation, and
was dated March 8.4 Of even date with this there is a letter of author-
ization addressed to L. Murray Eades and signed, as he acknowledged
in his own evidence, by William L. Walton in the following terms:
"You are hereby authorized to enter into an agreement in the
attached form with Atlantic Acceptance Corporation Limited for the
purchase and sale of all the issued and outstanding shares of Crest
Acceptance Corporation Limited.
'Exhibit 790.
'Exhibit 793.
'Exhibit 795.
183
Three Acquisitions
For so doing this shall be your good and sufficient authority.
In accordance with our agreement of trust I undertake to indemnify
you and save you harmless in respect of entering into this agreement."
and to this is attached a copy of the agreement of purchase and sale
between Atlantic and Eades with the date and signatures of Morgan and
Eades omitted.5 The deal was closed by Eades in the offices of Messrs.
Osier, Hoskin & Harcourt in the presence of a Mr. Moffat of that
firm and of C. P. Morgan. Eades testified that he disclosed to Moffat
in the course of the negotiations that he was acting as a trustee, but not
the name of his beneficiary.
Atlantic Pays the Trio a 60% Profit
Atlantic's cheque for $27,000, dated March 8, 1962 and drawn
on the Oakville branch of the Toronto-Dominion Bank,1 was deposited
by Eades in his trust account the following day, at which time Eades
drew a cheque in favour of Wm. L. Walton for the same amount2 and
this was endorsed by the latter and deposited in Guaranty Trust
account No. 13955. A deposit slip in the deposit book for account No.
13324 in the same institution — the Trio account — on March 9 was
acknowledged by Walton in his evidence, and Walton asserted that this
deposit was made in accordance with Morgan's instructions. Finally
Eades sent his account to Chartered Management Consultants and this
was paid on April 19 by a cheque of that company signed by Walton
in the amount of $661.50.3 The minutes of the board of directors of
Crest Acceptance for March 8 record a transfer of 10,100 common
shares and 17,000 preference shares to Atlantic Acceptance and of one
common share each from Cooper, Levine and Shirley Fruitman to
Morgan, A. C. Rooney and A. T. Christie. The new board resolved to
apply for supplementary letters patent changing the company's name to
Adelaide Acceptance Limited and to appoint W. E. Butlin as manager.
W. L. Walton, in his evidence given before the Commission, on
oath, made no difficulty about recalling this transaction or identifying the
documents in connection with it which were put to him, except as to
one and, of course, the most important particular. He claimed that
he did not know that Morgan was causing Atlantic to purchase the
Crest shares for $27,000, a mark-up of $16,000, although he acknowl-
edged receiving the $27,000 and making the deposits described, but gave
the following answers to questions put to him by Mr. Shepherd:4
"Q. When did you first learn Atlantic Acceptance was purchasing or
had purchased the company for $27,000?
■Exhibit 796.
Exhibit 794.
'Exhibit 797.
•Exhibit 798.
'Evidence Volume 81, pp. 10866-71.
184
Chapter V
A. Well, I cannot remember — except after probably Eades had given
me his report on it.
Q. If I might just take a moment to assist you on this: I show you, Mr.
Walton, Exhibit 792, being a purchase agreement directed to Harvey
Cooper, Suite 803, 62 Richmond Street West, on the 8th of March,
1962, generally to the effect that Mr. Cooper shall sell and Mr. Eades
shall purchase all the outstanding common and preference shares for
$11,000. Is that the agreement to which you had reference when you
said Mr. Eades was to purchase from Mr. Cooper?
A. Yes, I would think so.
Q. Why was Mr. Eades to take it in his name as opposed to you
purchasing it in your name?
A. I cannot remember except that I probably wanted to give Mr. Eades
a little business.
Q. Then I show you Exhibit No. 795 in which Mr. Eades on the same
day, the 8th of March, 1962, declares himself as a trustee for you in
respect of these shares of Crest, is that correct?
A. That's right, sir.
Q. And that document is signed by you and Mr. Eades, is it not?
A. That's correct.
Q. Then I show you Exhibit No. 796, Mr. Walton, being a letter
addressed to Mr. Eades and signed by you, and also dated the 8th
of March, saying that you are hereby authorized to enter into an
agreement in the attached form with Atlantic Acceptance Corporation
Limited for the purchase and sale of all the issued and outstanding
shares of Crest Acceptance Corporation Limited, and the agreement
attached, I put it to you, Mr. Walton, is a copy of Exhibit 793, that is
to say, the agreement whereby Atlantic agreed to buy the company. Did
you sign that direction to Mr. Eades?
A. Yes, that's my signature.
Q. So it would appear, Mr. Walton, you have fallen into error in saying
that you didn't know that Atlantic was the purchaser of this company
at $27,000 until some time after you had acquired the company
pursuant to Mr. Morgan's instructions, because there you are, Mr.
Walton, on the same day, telling Mr. Eades to sell the company to
Atlantic for $27,000, isn't that correct?
A. I never told him to sell it at $27,000. He had made all the arrange-
ments with Atlantic. I didn't tell him to sell it at any price.
Q. Did you not, Mr. Walton, on the document which I just now showed
you, Exhibit 796, instruct Mr. Eades in writing to enter into the
agreement for sale with Atlantic Acceptance, a copy of which was
affixed to your instructions?
185
Three Acquisitions
A. But he did this with Mr. Morgan. He didn't do this with me. I
didn't sell it to Atlantic.
Q. I wasn't suggesting that you did.
A. I am sorry.
Q. Looking at Exhibit 796, is it not clear that you in writing instructed
Mr. Eades to enter into an agreement with Atlantic Acceptance for the
purchase of these shares for $27,000, dated the 8th of March — the same
day as you acquired them?
A. I never saw this agreement, Mr. Shepherd.
Q. Did you sign the direction without the agreement being attached
to it?
A. Definitely.
Q. You didn't know then that Mr. Eades was selling it to Atlantic or
you didn't know he was selling it for $27,000?
A. All I knew, he was selling it to Atlantic, but I didn't know the price.
I signed this authority for him so that he could deal with Atlantic.
Q. Did you ask him at what price he was selling it to Atlantic?
A. No, Sir.
Q. When did you first learn the price at which he had sold it to
Atlantic?
A. After he gave me the cheque, I presume.
Q. And that was the 9th of March, the next day. I show you Exhibit
No. 797, which is a cancelled cheque of Mr. Eades' dated the 9th of
March, payable to you in the amount of $27,000, and negotiated on the
9th of March, signed by Mr. William L. Walton for deposit only to the
credit of Account 13395, is that correct?
A. That's right, sir.
Q. I put it to you, Mr. Walton, that the documents make it plain that
you caused Mr. Eades as your nominee to enter into a purchase agree-
ment with Mr. Cooper for $11,000 and substantially contemporaneously
therewith you instructed Mr. Eades to sell the company to Atlantic for
$27,000, he did that and you received a net profit of $16,000 and paid
it into the Trio account. Do you say that is not so?
A. May I see — when I signed this letter of authority it was for him
to enter into negotiations with Atlantic, which he did with Mr. Morgan,
and all I did was just give him a letter of authorization to deal with Mr.
Morgan and Atlantic. I have never seen this agreement.
Q. I suggest that the wording of the letter has not contained that
instruction: 'You are hereby authorized to enter into an agreement in
the attached form with Atlantic Acceptance Corporation Limited for
186
Chapter V
the purchase and sale of all the issued and outstanding shares of Crest
Acceptance Corporation Limited', and the attached form refers to a
purchase price of $27,000; isn't that right?
A. But I would not be able to set the price, but I didn't know what value
Mr. Morgan sets on it. The only person who would know what the tax
loss is worth is one who would know what use to put it to.
Q. When you did find out that Atlantic Acceptance had paid $27,000
for this company — which you must have found out on the 9th of March
when you received the money — did you give any thought as to whether
from the point of view of Mr. Morgan this was an honest transaction?
A. Well, I couldn't venture any opinion on that. I could see it was
a good deal for Atlantic Acceptance.
Q. But Atlantic Acceptance made money on the tax loss, didn't they?
A. That would appear to be so.
Q. My questions are directed to the issue of why they didn't make an
additional $16,000. When did Mr. Morgan tell you Atlantic Acceptance
had purchased for $27,000?
A. I don't think he told me it but I got this cheque from Mr. Eades.
Q. When did he tell you to put the cheque or the net of $16,000
ansing out of that cheque into the Guaranty Trust bank account?
A. I cannot pin it down to a right date — I don't know when. It must
have been some time afterwards.
Q. What date did you pay it in?
A. What day? What deposit?
Q. You have the deposit book there.
A. March 9th on the deposit book.
Q. And that's the same day as you got the cheque?
A. That's right.
Q. So he must have told you that very day to pay it into that account?
A. It appears that way."
Wagman simply denied that he knew anything about the trans-
action until he had viewed the passbook and deposit book of the Trio
account some time later with Walton. He pointed out that the deposit
slip in relation to the $16,000 was entirely in Walton's handwriting.
Thus was Adelaide Acceptance Limited brought into the orbit of
Atlantic and added to the Adelaide Street group operated from the
executive offices of Atlantic Acceptance. I am satisfied that Morgan,
Walton and Wagman knew exactly what they were about, with the pos-
sible exception that Morgan and Wagman did not realize that their
187
Three Acquisitions
partner contrived to make an additional profit of $2,000 out of his ar-
rangement with Cooper which was apparently not shared. I am equally
satisfied that Eades was an innocent, if incurious, party to a simple but
shocking fraud upon Atlantic Acceptance perpetrated by its president in
breach of his fiduciary obligation to the company and eagerly abetted
by his partners. It is unfortunate that no further inquiries were made by
Atlantic's solicitors in this matter and unlikely that Eades would have
refused, or having refused, persisted in refusing to disclose the identity
of the beneficiary for whom he was providing concealment.
188
CHAPTER VI
The John Belli Affair
The Revival of "Angelo's"
Thirty years ago and more in Toronto, when Ontario was emerging
from the years of scarcity and want known as the Depression, the im-
pulse towards a fuller life was accompanied by an amelioration of pro-
hibitive liquor laws which had first been enacted as a reflection of the
sacrifices demanded of Canadians in the First World War. In an area
of Toronto then known as "the Village", which has now largely disap-
peared beneath the annexes of the great hospitals facing University
Avenue, was an establishment called "Angelo's". Situated in an old
house and sanctioned by one of the early tavern licences in this rena-
scent period of the public consumption of alcohol, its proprietor dis-
pensed Italian food moderately fortified with beer and wine. The house
and indeed the mildly adventurous feeling which frequenting it gave to
a pre-war generation have long since disappeared, but the recollection
of its name and function survived to inspire a former employee by the
name of John Belli to acquire premises at 45-47 Elm Street and do
business there as "Old Angelo's Restaurant".
Through his solicitors, Messrs. Crabtree, Crabtree and Stewart,
John Belli secured letters patent dated May 30, 1958 for the incor-
poration of a private company in Ontario by the name of John Belli
Operations Limited. The minutes of directors' and shareholders' meet-
ings were curiously silent about any undertaking which the company
was formed to acquire. No agreement of sale or assignment of lease is
to be discovered in the company's records, but John Belli comes quietly
in to accept the transfer of one of the incorporators' shares. It is
known, however, from other documents that during the year follow-
ing granting of the company's charter a debt to Fairfax Investments
(Canada) Limited of substantial proportions was incurred in the course
189
John Belli Affair
of preparing the Elm Street premises for business and a mechanics' lien
certificate was registered against the title. In June 1959 there appeared
on the scene two customers men employed by the Toronto stock-broking
firm of Gardiner, Watson Limited, John R. Shemilt and Robert L.
Hunter. Shemilt has been encountered before, but chronologically at a
later stage of his career when he was manager of Netherlands Overseas
Corporation Canada Limited, a Canadian subsidiary of the Netherlands
Overseas Bank of Amsterdam. How the original connection arose is
not clear, but Belli took his financial problems to Shemilt and Hunter
who in turn consulted C. P. Morgan. The latter promised his help and
the three of them agreed to lend John Belli Operations Limited the sum
of $30,000 in equal amounts of $10,000. Shemilt and Hunter each
contributed $5,000 from their personal funds, borrowing an additional
$5,000 each from Morgan, who in turn borrowed from the Toronto
branch of the Bank of Nova Scotia which, as has been seen, was at this
time intimately connected with the initial financing of Commodore Sales
Acceptance. Subsequently each of the three contributed a further $500
on August 17, 1959.
What follows may not, at first glance, be regarded as a transaction
of such magnitude as to require a separate chapter of the report. Yet
here may be seen emerging, after Morgan had been only six months in
Toronto, patterns which may be discerned, with as much clarity as their
complexity permits, in all the subsequent operations of the Trio. Con-
flict of interest so flagrant as to require concealment by the interposition
of private companies which they owned or controlled, the employment
of untried lawyers in business from which scrupulous practitioners would
have recoiled, falsification of records and the secret extraction of dis-
honest profits from a borrower of Atlantic funds may be identified in
this, the earliest of their joint undertakings.
Financing John Belli Operations Limited
The minutes of a meeting of the board of directors of the company
dated June 2, 19591 show 3,000 Class A preference shares and 1,000
Class B preferred shares each with a par value of $10, and 19,997 com-
mon shares with no par value, as unissued in the treasury, Belli, Shemilt
and Hunter each holding one share, and these three at a meeting of the
shareholders on the same date resolved that the auditors of the company
should be Walton, Wagman & Co. Subsequently on June 4, 10,000
common shares were issued to John Belli who transferred 3,334 of them
to John R. Shemilt. Two agreements bearing the same date were exe-
cuted. The first2 is between Belli, Shemilt, Hunter and Morgan wherein
it is recited that John Belli Operations Limited has acquired a dining
'Exhibit 184.
■Exhibit 2086.
190
Chapter VI
room licence from the Liquor Licence Board of Ontario for the sale of
beer and wine with meals, that John Belli has obtained a lease of the
Elm Street premises which contains covenants that Belli will assign this
lease to the company of which he is to become president and Shemilt
treasurer, and that he will give a promissory note to Shemilt, Hunter and
Morgan for $30,000 and interest at current bank rates for which the
latter agree to deposit that sum in the company's bank account. A third
of the issued capital stock is to be held in trust by Shemilt for Hunter,
Morgan and himself. The second agreement3 is between the company and
Fairfax Investments, reciting the debt owed to the latter as $53,944.57
on which $7,000 is acknowledged to have been paid, and the parties
agree that $30,000 will be paid to Fairfax Investments on account and
the balance of $16,944.57 be secured by a note payable on September
30, 1959, and collaterally secured by a chattel mortgage, in return for
which Fairfax Investments agrees to vacate its mechanics' lien. Fairfax
Investments directs John Belli Operations to pay $2,525 of the $30,000
to Hastings Park Estates Limited. Thereafter a third agreement, made
on December 7, 19594 between John R. Shemilt as trustee and John
Belli, Robert L. Hunter, C. Powell Morgan and John R. Shemilt indi-
vidually as beneficiaries, provides that Shemilt should hold the 10,000
issued common shares as trustee for Belli to the number of 6,666, for
himself and Hunter as to 1,000 each, and for Morgan as to 1,334,
reciting payment by the beneficiaries of 10^ per share. An unusual
provision provided that the trustee should transfer or otherwise deal
with these shares only at the direction of Morgan and to the exclusion
of the other beneficiaries; execution of this agreement was witnessed by
Harry Wagman.
Another directors' meeting was held at the office of Solomon &
Samuel on June 21, 1960 and according to the minutes was attended
by Belli, Hunter and Shemilt. On this occasion, as a means of reducing
the company's indebtedness to the shareholders, the following issue of
preference shares was made:
Amount of Number of Class A
Indebtedness Preference Shares
John Belli $13,800 1,380
C. Powell Morgan 2,300 230
John R. Shemilt 2,300 230
Robert L. Hunter 2,300 230
This was described in the minutes as settlement in full of the company's
indebtedness to them.
The next item of business was the announcement of a loan by
Atlantic Acceptance Corporation Limited of $65,132.91 on condition
"Exhibit 2099.
'Exhibit 2087.
191
John Belli Affair
that the company discharge its indebtedness to Executive Acceptance
Corporation Limited, Commodore Sales Acceptance Limited and the
Premier Finance Corporation Limited in the total amount of $39,759.93;
this loan would be secured by a chattel mortgage yielding interest at
14.4% per annum, and the shareholders of the company would assign
to William L. Walton as trustee all the outstanding Class A preference
shares. Transfer of the preference shares to Walton, who, incidentally
was president of Executive Acceptance Corporation, was duly made, and
appended to the minutes of this meeting was a schedule of shareholders
snowing Belli with 6,667 and Shemilt with 3,335 common shares, Hunter
with one common share and Walton with 2,070 Class A preference
shares. It will be noted that, according to this statement, John Belli's
common shares do not appear to have been transferred to Shemilt pur-
suant to the agreement of December 7, 1959.
Walton's Disbursement of the Atlantic Loan
It had been agreed, according to the minutes, that in this consoli-
dation and repayment of the debts of John Belli Operations moneys due
to creditors would be disbursed by Atlantic Acceptance. In fact it was
done by Walton, Wagman & Co., as appears from a letter dated June 20,
1960, addressed to John Belli Operations and signed for his firm by
William L. Walton, to which was appended the following statement of
receipts and disbursements:1
STATEMENT OF RECEIPTS AND DISBURSEMENTS
RE: CONSOLIDATION OF LOANS AND FINANCE CONTRACTS
FOR JOHN BELLI OPERATIONS LIMITED
Received from Atlantic Acceptance Corp. Limited $65,132.91
Disbursed on behalf of John Belli Operations Limited.
Premier Finance Limited $12,096.00
Commodore Sales Acceptance Limited 16,133.07
Executive Acceptance Limited 11,350.86
Mr. C. P. Morgan 10,500.00
Mr. John Belli 14,752.98
Mr. John Shemilt 10,500.00
Mr. R. Hunter 10,500.00
$85,832.91
Less: Payments re: Subscription for Preferred Shares as follows:
Mr. C. P. Morgan $ 2,300.00
Mr. John Belli 13,800.00
Mr. John Shemilt 2,300.00
Mr. Robert Hunter $ 2,300.00 $20,700.00 $65,132.91
Balance on Hand Nil
Exhibit 1852.
192
Chapter VI
Walton employed account No. 13324 at the Guaranty Trust Company
of Canada, previously referred to as the Trio account, and a deposit note2
indicates that the sum of $65,132.91 was deposited to the credit of that
account on June 21, noted as "Atlantic re John Belli". The manner in
which this disbursement was carried out is copiously illustrated on
Table 34,3 which was prepared and submitted in evidence by Mr. B. W.
McLoughlin. The top line of the analysis shows the various liabilities
of John Belli Operations which were consolidated, and includes the debt
to Hastings Park Estates Limited apparently not yet paid in accordance
with the direction of Fairfax Investments of the previous year. These
are the ledger balances as at June 20, 1960. The loans payable account
No. 37 consists of the $1,500 advanced by Shemilt, Hunter and Morgan
and the notes payable of the $30,000 first advanced by these share-
holders. The John Belli account No. 50 consists of moneys personally
contributed by John Belli. The second and third lines show the way
the consolidation and payment were treated in the books of John Belli
Operations according to the journal and ledger entries of June 20. Next
are disbursements made on behalf of the company according to the
statement of Walton, Wagman & Co. referred to above, and it will be
noted that, contrary to what is said in the minutes, the issue of the 2,070
Class A preference shares is regarded only as a part payment of the
indebtedness to shareholders, so that John Belli is considered to be
owed $952.98 and Shemilt, Hunter and Morgan $8,200 each. Below
this is set out a list of the actual payments made in settlement of the
company's debts by Walton out of the Trio account, and it will at once
be seen that Executive Acceptance Corporation, Premier Finance Cor-
poration and Commodore Sales Acceptance, the affairs of the first being
in the hands of Walton, and the second and third in those of Morgan,
were settled at a substantial discount amounting in the aggregate to
$7,579.93. All these disbursements are confirmed by debit vouchers
relating to the Trio account.4 The two payments in respect of Shemilt
and Hunter, in the amount of $4,900 each, to the Bank of Nova Scotia
represent repayment of Morgan's loan to them and the bank's loan to
Morgan of the amount outstanding. The final portion of the accountant's
analysis deals with the allocation of the variance of $7,579.93 created
by the discounted settlement of the claims of Executive Acceptance.
Premier Finance and Commodore Sales Acceptance and still remaining
in the Trio account. This is accounted for by cheque No. 47 paid to the
order of cash for $2,5005 which is endorsed "W. L. Walton", under which
appears the signature "B. Livingstone" and the notation "25 x 100",
and the withdrawal of $2,500 corresponds to an entry in the passbook
•Exhibit 809.
'Exhibit 2106.
'Exhibit 810.
"Exhibit 810.
193
John Belli Affair
of the Trio Account6 for June 21, 1960 containing a notation in pencil
"cash re C.P.M.". Cheque No. 46 dated the same day was issued to
Solomon & Samuel in the amount of $79.93 and corresponded to a
credit in that firm's clients' ledger for Atlantic Acceptance particularized
as "Atlantic fees & disb. re John Belli Operations". It is perhaps of only
passing interest that no statement of account by Solomon & Samuel in
this amount has been located among the many documents furnished by
that firm to the Commission. The balance of $5,000 remained in the
Trio account.
The Aurora Leasing Loan
The next example of assistance to John Belli Operations Limited
at Morgan's behest occurred over a year later when Aurora Leasing
Corporation advanced $12,250 to defray the company's expenses, the
general journal of the latter recording a total liability of $19,500 and
the balance of $7,250 being a prepaid interest charge.1 Out of this were
paid legal fees to Messrs. Crabtree, Crabtree and Stewart of $1,250 for
services ending in June 1959, accounting fees paid to Chartered Man-
agement Consultants described as prepaid expenses of $1,000 and an
amount of $10,000 described as goodwill, the whole $19,500 being
annotated as "Aurora Leasing Corp'n Ltd. to record expenditures made
by the latter on our behalf". Aurora's only security was a note dated
December 1, 1961, executed for the company by Belli and Shemilt but
not under seal.
The item set up as goodwill refers to two amounts of $5,000 both
paid to John Belli, one on June 29, 1961 and the other on December
14 of the same year. The first consisted of a cheque made payable to
Solomon & Samuel in trust, not recorded in that firm's trust account but
negotiated by David M. Samuel, the proceeds being presented to Shemilt
in the presence of Belli at Samuel's office in the form of fifty $100 bills.
For this Shemilt and Belli signed a receipt. Belli was examined by Mr.
Cartwright on two occasions on January 20 and February 13, 1967
respecting this transaction.2 On the first occasion he said that he had
received the money personally, that Old Angelo's Restaurant held a
licence to serve beer and wine with meals and that in the spring of 1961
application was made for an extension to it permitting the sale of liquor
with meals. The company received notice dated May 18 that a hearing
of applications would be held on June 20, and Belli then approached
Morgan and suggested that it pay him $5,000 so that he might make a
donation to a "political fund" in that amount to ensure success. Morgan
agreed, but before Belli could obtain the money or pay it to anyone, the
"Exhibit 807.
'Exhibit 2093.
Exhibits 4878-9.
194
Chapter VI
Liquor Licence Board of Ontario approved the application and advised
him by letter dated June 21. Then on June 29 Shemilt handed him the
$5,000 in cash and Belli stated that he duly made the donation to the
"political fund". He could not identify the fund and, when pressed, he could
not remember the name of the person to whom he paid the money; he
said he handed it to someone at the restaurant in a plain envelope on
June 29 or 30. When Mr. Cartwright persisted in asking the identity
of the recipient of the money Belli said he wished to retain counsel and
the hearing was adjourned for this purpose. On re-attending with coun-
sel, the witness repeated his account of paying out this money and re-
fused to answer further questions on the matter on counsel's advice,
essentially upon the ground that, having given the assurance that no
one connected with Atlantic Acceptance received the money and
having freely admitted that he received it himself, further questions
respecting what he did with it were irrelevant and outside the Commis-
sion's terms of reference. Suffice it to say that subsequent investigation
has not disclosed that any of this money found its way into the hands of
anyone connected with Atlantic Acceptance or any of its subsidiary or
associated companies, and that no subsequent extension of "Old
Angelo's" liquor licence has been obtained.
The second cheque was made payable to John Belli,3 was cashed
by him and the proceeds divided between himself, Shemilt, Hunter and
Morgan. According to Shemilt,4 he received $2,000 of which he
remitted $1,000 to Hunter, the balance being split between Belli and
Morgan. He described it as a dividend "in the very loosest sense of the
word" and made a point of the fact that the loan from Aurora had been
repaid. He knew of no service performed up to that time by Chartered
Management Consultants and, although he was secretary-treasurer of
John Belli Operations, maintained that he did not then even know its
name. The payment in any event was not connected with the normal
accounting services of Walton, Wagman & Co. As to the prepaid
interest of $7,250 out of the total of $19,500 lent by Aurora, Shemilt
believed that this included rental charges of certain equipment installed
in the premises of Old Angelo's Restaurant.
Departure of Belli and Hunter
By mid- 19 62 the affairs of John Belli Operations were far from
prosperous and it was clear that both Morgan and Shemilt attributed
such difficulties to John Belli. Shemilt described how he told Belli that
he would buy him out for $20,000 or, if Belli preferred, he could buy
Shemilt out for $10,000. On June 12, 1962 an agreement was entered
into between John Belli, John R. Shemilt and John Belli Operations
Limited which recited the shareholdings referred to in the minutes of
'Exhibit 2083.
'Evidence Volume 32.
95
John Belli Affair
June 21, 1960 and provided for Belli's sale to Shemilt of the former's
6,667 common shares and 1,380 preference shares for the price of
$20,000, and the further payment to Belli by the company of a retire-
ment allowance amounting to $12,500, payable in instalments of $100
over 125 consecutive weeks. Further provision was made for the pur-
chaser to secure the approval of the transfer by the Liquor Licence
Board and the vendor to assign the lease of the premises to the company
which had never yet been done.
This was followed by a supplementary agreement dated the follow-
ing day which included among other things a provision for the purchaser
and the vendor to split the transfer fee of the Liquor Licence Board be-
tween them. Both were drawn by Solomon, Singer & Rosen, the firm not
only having been enlarged but having moved to the Bank of Nova Scotia
building at 44 King Street West, away from the immediate neighbour-
hood of the offices of Walton, Wagman & Co. At the same time Shemilt
by mutual arrangement with Hunter bought for himself the latter's inter-
est since Hunter, as Shemilt said in evidence, had financial problems of
his own and was anxious to withdraw. The minutes of a meeting of the
board of directors dated June 29 reflect the transfer of common shares
to the number of 6,666 to Shemilt and one to John Canning, an em-
ployee of Chartered Management Consultants, and of one common
share from Hunter to J. C. Laidlaw, Canning and Laidlaw on the same
day executing declarations of trust that they held their single shares for
Shemilt. The minutes are silent about the disposition of the preference
shares of which John Belli was a beneficial owner but a letter to Shemilt
from Solomon, Singer & Rosen, signed by Carl Solomon and dated July
11, reporting on the transaction, enclosed an acknowledgment and
direction addressed to William L. Walton as trustee, acknowledging
that Belli had no further interest in 1,380 of the company's preference
shares and directing him to assign them to such persons as Shemilt him-
self might direct. Solomon also reported that a certificate for Belli's 6,667
common shares had been cancelled and that certificates had been issued
for one share each to Shemilt, Laidlaw and Canning and four certificates
to Shemilt, consisting of one for 3,334 and three for 2,221, 2,222 and
2,223 shares each.1 Two-thirds of the common shares were therefore
in the hands of Shemilt and two employees of Chartered Management
Consultants, and Shemilt's were in a form which strongly suggested an
equal division, either completed or impending, among three associates.
Indeed copies of this letter were sent to Morgan and Wagman.
This transaction was financed by Chartered Management Consult-
ants; its books2 record a loan from the Canadian Imperial Bank of
Commerce of $25,000 obtained on July 4, 1962, and the company's
bank loan ledger is marked, "re Belli' with respect to the entry of
'Exhibit 1849.
•Exhibit 1773.
196
Chapter VI
$25,000. Three cheques were issued by Chartered Management Con-
sultants, the first made on June 29 being to Solomon, Singer & Rosen
in trust in the amount of $17,500, the second the same day to the
Guaranty Trust Company of Canada in the amount of $5,000 and the
third to C. P. Morgan for $3,227 on July 4.3 The first cheque was used
by Solomon to complete the transaction whereby Belli's interest in John
Belli Operations was purchased, the total purchase price of $20,000
being reduced by one-half of the estimated transfer tax in respect of the
company's liquor licence in the amount of $2,500 and by security trans-
fer tax in the amount of $20, and the net amount paid on closing to
Belli's solicitors was $17,480. The second cheque was for the estimated
amount of the licence transfer tax and paid into Shemilt's savings ac-
count at the Guaranty Trust Company. The third to Morgan, drawn on
July 4, requires some explanation. The cash disbursement sheet of
Chartered Management Consultants on which these payments are
recorded shows in relation to it the following notes:
1656 Pref. at $10—16,560
6667 Common, $1 — 6,667
These amounts are then added together to produce $23,227 under
which is the notation "paid $20,000", the difference being of course the
amount of Morgan's cheque. This amount which was deposited in
Morgan's account No. 456-347 at the Bank of Nova Scotia4 represents
the excess of the valuation of 1,656 preference and 6,667 common
shares over the amount of the price paid to John Belli of $20,000. The
sum of $25,727, being the total of the three cheques issued by Chartered
Management Consultants, is shown by that company as an account re-
ceivable from John Belli Operations Limited and appears as such in the
next balance sheet. On July 5, 1963, just a year later, that amount is
shown as being received, thus clearing the balance of the account.
Walton's Working Papers
The documents relating to the part played by Chartered Manage-
ment Consultants in this transaction are all part of those seized by the
Department of National Revenue (Taxation) from the offices of Walton,
Wagman & Co. on December 11, 1963 and among them is a hand-
written memorandum on the letterhead of Atlantic Acceptance Corpor-
ation Limited. It sets out, in what would appear from other compari-
sons to be Walton's hand, the shareholdings in John Belli Operations of
Belli, Shemilt, Hunter and Morgan as reflected in the agreement of
December 7, 1959, but showing a revision of the amount of preference
shares, consciously made, to give Shemilt and Hunter 207 preference
shares and Morgan 276 preference shares, indicating a transfer from
8Exhibit 1773.
'Exhibit 2074.
197
John Belli Affair
Shemilt and Hunter of 46 preference shares to Morgan which is nowhere
confirmed by the company's records. The memorandum goes on to
arrive at the figure of $3,227, the amount paid to Morgan, and is appar-
ently an attempt to make the preference shareholdings correspond to
the ratios of the common shareholdings with Belli holding 66%%,
Morgan 13!/S%, and Hunter and Shemilt 10% each. The total there-
fore of Belli's preferred stock at $13,800 and common stock at $6,667,
and Morgan's 276 preferred at $2,760, gives a figure of $23,227 from
which $20,000 is deducted to produce the balance paid to Morgan as
has been seen; this calculation of course depends upon valuing the com-
mon shares for the first time in the company's history at $1 per share.
Chartered Management Consultants therefore financed the purchase
not only of the interest of John Belli in John Belli Operations but of 276
preference shares said to belong to C. P. Morgan; and in spite of the
evidence of written agreements, the statement of investments of C. P.
Morgan, William L. Walton and H. Wagman as at August 31, 1962
previously referred to1 shows, under the heading "Shares in Private
Companies — Valued at Cost", an entry of 6,669 common and 1,656
preferred shares of John Belli Operations Limited valued at $22,500,
indicating by this time an actual acquisition through Chartered Man-
agement Consultants by the Trio of all Belli's and Morgan's preference
shares and the two qualifying shares held by Canning and Laidlaw.
This valuation is equivalent to the gross amount payable to Belli and
one-half of the estimated amount of the Liquor Licence Board's transfer
fee.
Another working paper of Walton's throws additional light on this
transaction and on the care taken by Walton to hold the scales evenly
in a Trio affair. It begins by showing, opposite the names of John Belli,
John R. Shemilt and R. L. Hunter, shareholdings in two columns, the
first being described "As per L.C.B. forms", and the second headed,
"Should be as set out below". There is no doubt that the heading of the
first column refers to the forms required to be filed with the Liquor
Licence Board of Ontario on applications for granting renewal or trans-
fers of licences under the Liquor Licence Act, as the evidence of Shemilt
indicated,2 and not to the Liquor Control Board which is a different
body. However, for the benefit of the Board, John Belli is shown as
holding 6,667 common and 1,380 preference shares, John R. Shemilt
3,335 common and 690 preference shares and R. L. Hunter one com-
mon share; then the figures as they "should be" are set down with Belli's
holdings the same, Shemilt having 1,001 common shares and 207 pref-
erence shares and the same amount for Hunter, below which appears
"Morgan" with 1,334 common and 276 preference shares, both columns
totalling 10,003 common and 2,070 preference shares. Below that there
^able 30.
'Exhibits 1679.3 and 1679.4.
198
Chapter VI
appears a note which generally corresponds with the number of shares
according to the certificates issued and reported upon in Carl Solomon's
letter to Shemilt of July 11, 1962, but with certain initials annexed, so
that the entry appears :
"JRS 3,334
CPM 2,223
WLW 2,223
HW 2,223"
Then inside a pencilled square is the legend: "true ownership as follows,
Belli 662/3%, Shemilt, 10%, Hunter 10%, Morgan 13^3%, totalling
100%", and the notes continue "John Belli shares are worth as follows
based on today's purchase price:
1380 pref at $10 $13,800
6667 common shares for 6,200
$20,000
Sale price of common shares is 930"
Based on this calculation Walton goes on to value Morgan's "present
holdings" of 276 preference and 1,334 common at $4,000.62 and ends
with the note "W.L.W. and H.W. will pay C.P.M. 2/s of $4,000.62—
$2,667.08". Of this treatment of the matter Shemilt firmly maintained
that he knew nothing and could not explain the fact that the certificates
actually issued to him were four in number, three of which were for
equivalent amounts. He said that the decision to buy out Belli was his
own, and that Morgan had told him to go ahead and not to worry about
the money which would be provided.
Shemilt Buys out Morgan with an Aurora Loan
Shemilt's management of Old Angelo's Restaurant continued for a
year thereafter without apparent incident. There is no evidence of his
having paid any interest on the money advanced by Chartered Manage-
ment Consultants, and indeed considering the part he had played in the
acquisition of the minority interest in Commodore Sales Acceptance
there was every reason why he should be treated tenderly by Morgan.
If John Belli had elected to buy Shemilt out in June, 1962 for the sug-
gested figure of $10,000, and if, as Shemilt stated in evidence, that
$10,000 would have included a valuation of C. P. Morgan's interest in
the business, the situation had changed markedly by July 1963. At this
time, according to Morgan,1 Shemilt felt he was working too hard and
getting too little out of John Belli Operations and was anxious to buy
him out. Buy him out he did, and two documents having a bearing on
the "pay-out", to use Morgan's word, must first be looked at. At a
'Evidence Volume 26.
199
John Belli Affair
meeting of the board of directors of John Belli Operations held in
Solomon's office on July 2, 1963 the board approved the transfer of the
two shares held by Canning and Laidlaw to Geraldine M. Shemilt and
Shirley Robertson. The meeting was then advised that Aurora Leasing
Corporation Limited was prepared to lend the company $75,000 at
12% to be secured by a chattel mortgage on the company's equipment,
provided that it discharged its indebtedness to Atlantic Acceptance
Corporation, Adelaide Acceptance and Aurora Leasing Corporation in
the aggregate amount of $44,657.59. The acceptance of this loan and
compliance with the conditions attached to it having been decided upon,
the meeting was advised that 2,070 Class A preference shares of the
capital stock of the company registered in the name of William L.
Walton as trustee were to be transferred to John R. Shemilt, these shares
being described as held by Walton as collateral security for the indebted-
ness to Atlantic Acceptance. Finally the seal was set on the new regime
by a decision to apply for supplementary letters patent changing the
name of the company from John Belli Operations Limited to Old
Angelo's Restaurant Limited. The second document is an agreement
dated July 2, 19632 between C. Powell Morgan, John R. Shemilt and
John Belli Operations Limited emanating from the offices of Solomon &
Singer which begins with the startling recital that Morgan is the "regis-
tered and/ or beneficial owner of 2,070 Class A preference shares in the
capital stock of the company", continues by reciting the indebtedness
to Atlantic, Adelaide and Aurora and proceeds with the words "and
whereas Morgan has certain claims against Shemilt which Shemilt has
and does hereby acknowledge". Morgan thereupon agrees to sell his
2,070 preference shares held for him by Walton in trust, releasing
Shemilt from all claims, and Shemilt agrees to pay to Morgan the sum
of $100,000 to be applied as follows:
"(a) The purchase price for the said 2070 Class A
Preference Shares $20,700.00
(b) To discharge the indebtedness (except under a
certain lease between Aurora Leasing Corpora-
tion Limited and Company) to Aurora Leasing
Corporation 10,000.00
(c) To discharge the indebtedness to Atlantic
Acceptance Corporation Limited 24,657.59
(d) To discharge the indebtedness to Adelaide
Acceptance Limited 10,000.00
(e) The balance in full satisfaction of any claims
which Morgan may have up to the present time
against the said Shemilt 34,642.41
$100,000.00"
'Exhibit 1679.1.
200
Chapter VI
Walton, strangely enough, is not a party to the agreement execution of
which is witnessed by Irwin Singer.
When the first recital as to Morgan's ownership of the whole issued
and outstanding preferred stock was put to him Shemilt said that he
could not explain it and that it was not correct.3 He did not consider
the constituents of the $100,000 figure important, but emphasized the
fact that he had gone to Morgan, told him that he was in a position to
repay the loans to him and to buy out Morgan's interests and they had
agreed on the figure of $100,000. The amounts representing the sale
of 2,070 preference shares and satisfaction of "any claims" of Morgan
against Shemilt were, according to the latter, merely balancing figures,
the essence of the transaction with Morgan being payment of the trade
debts to Atlantic, Aurora and Adelaide out of $100,000 and the pay-
ment to him of the balance. No reconciliation is possible between the
purport of this transaction and the beneficial ownership of the shares of
John Belli Operations which, as is known from the position reached
after acquisition of John Belli's interest in the previous year, must have
been as follows:
Common Preferred
Trio 6,669 1,656
Morgan 1,334 —
Shemilt 2,000 414
10,003 2,070
Funds for this purchase were provided by Aurora Leasing Corpora-
tion in the form of a loan to John Belli Operations of $75,000 and
Shemilt borrowed $22,000 from the Royal Bank of Canada, providing
$3,000 from his own funds, a total of $100,000 being paid to the trust
account of Solomon & Singer which again acted as the channel of dis-
bursement. All the cheques were dated July 4, Atlantic, Adelaide and
Aurora were paid in the amounts set out above and two cheques were
issued to C. Powell Morgan, one for $20,700 in respect of the prefer-
ence shares and the other for $34, 642. 41. 4 John Belli Operations
treated the difference between the $75,000 loan payable to Aurora and
the sum of the trade debts to Atlantic, Aurora and Adelaide of
$44,657.59 as a loan payable to it by John Shemilt in the amount of
$30,342.41 as at July 31, 1963. Morgan deposited both cheques in
the total amount of $55,342.21 in his account No. 753126 at the
Toronto-Dominion Bank on July 5.5 On the same day a cheque pay-
able to Dallas Holdings Limited, a Trio company, was issued in the
amount of $28,000 which was treated by it as a reduction of loans
'Evidence Volume 32.
'Exhibit 1045.1.
'Exhibit 2076
201
John Belli Affair
payable by "W.W., H.W. and C.P.M." and another cheque payable to
Chartered Management Consultants in the amount of $27,227, which,
as noted above, balanced the amount of $25,727 shown as being an
account receivable in the previous year, relating to the purchase of
Belli's stock and Morgan's 276 preferred shares in John Belli Opera-
tions. The remaining $1,500 was shown in the cash receipts book of
Chartered Management Consultants as "Triangle" and again as "T.W.",
and on the cheque itself6 there is also a note "re J.B. 25727, T.W.
1500." This is believed to relate to a concern called Triangle Ware-
housing Limited, known to have been a Trio company engaged in
advancing money against warehouse receipts, and to which a contribu-
tion of $1,500, represented as being $500 from each of Morgan, Walton
and Wagman, has been identified.7 Its operations do not appear to be
relevant to this inquiry and mention of its existence is only made be-
cause of C. P. Morgan's insistence, both in evidence before the Com-
mission8 and in his evidence given on discovery in the bankruptcy of
Dallas Holdings Limited,9 that it related to a profit he had made on
the stock market in shares of an oil company. Since this assertion was
repeated twice, accompanied by determination to have the payments
made to Chartered Management Consultants and Dallas Holdings duly
recorded as if they were not for his own benefit, it seems unlikely that
it is attributable merely to a lapse of memory.
Shemilt's contention about this transaction, so far as it relates to
the method of acquiring the full beneficial interest of all the issued stock
of John Belli Operations, is simply that he was either not aware of its
details, or, if he was, they made no impression upon him, because the
real arrangement, stripped of all fictions, consisted in getting his hands
on $100,000 and paying off Morgan and his companies in exchange
for the stock. His knowledge of the arrangement was doubtless suffi-
ciently exact, because on July 2 he wrote a letter on a plain sheet of
paper to Morgan in the following terms:10
"I refer you to an agreement dated July 2, 1963, made between
ourselves and others v/hereby, among other things, I agreed to pay to
you the sum of $34,642.41 in full satisfaction of your claims against me.
I acknowledge that these claims arose from moneys advanced by you
to me to enable me to purchase certain shares of stock."
Moreover he received a copy of Irwin Singer's reporting letter, addressed
to Aurora Leasing Corporation and to the attention of Harry Wagman,11
'Exhibit 1915.
'Table 30.
"Evidence Volume 26.
"Exhibit 3677.
"Exhibit 2108.
'•Exhibit 1679.2.
202
Chapter VI
in which, amongst other things, the details of the agreement of July 2
are carefully summarized. There is no mention in either of these docu-
ments of C. P. Morgan's 1,334 common shares and, indeed, in the appli-
cation for transfer of the liquor licence consequent upon Shemilt's
apparent purchase from Belli in the preceding year,12 Shemilt is shown,
attested by himself, as the owner of 10,001 common shares, being all the
issued common shares except those registered in the names of Canning
and Laidlaw. It is unnecessary for the purposes of this report to pursue
the history of Shemilt and his enterprise any further, other than to say
that he financed his own position by having the company redeem the
20,700 preference shares at par and lend him an additional $22,000
secured by a second mortgage on his house bearing interest at 4% . The
loan from Aurora was, moreover, and is in good standing.
C. P. Morgan's Profit
From his original investment of possibly $10,633.40 and the sub-
stantial loans made by Atlantic and its subsidiaries to a company with
no assets, unless one considers to be such the lease of the Elm Street
premises which enured to the benefit of John Belli personally, Morgan
did moderately well. He received a total of $10,700 on June 21, 1960
as a result of Walton's consolidation and settlement of the debts of John
Belli Operations at that time, together with a possible third interest in
the $5,000 kept by Walton in the Trio account after the settlement of
the claims of Commodore Sales Acceptance, Executive Acceptance and
Premier Finance at a discount and the writing off to "deferred dis-
counts" by those companies of the amounts not paid, a transaction
which subsequently led to criminal action being taken against Walton
and Wagman. On December 14, 1961 he split $3,000 with John Belli
in proportions which are not known, but from which it may be fairly
assumed he got not less than $1,500. On July 4, 1962 he received
from Chartered Management Consultants the sum of $3,227 from the
final settlement with John Belli, and from the $55,342.21 received by him
in the final settlement with John Shemilt he benefited to the extent of
one-third of this amount by paying all but $115.21 to two companies,
Dallas Holdings and Chartered Management Consultants in which he
had a third interest. If one treats the payment to Chartered Manage-
ment Consultants as including repayment for the money advanced to
enable Shemilt to buy out Belli, and on the assumption that the $3,227
was not split with Walton and Wagman, which can only be invalidated
by Walton's fugitive working paper, he made roughly $14,500. Walton
and Wagman's profit was of a lower order, but it was the Trio's first
joint venture and is mainly remarkable for the fact that Morgan allowed
"Exhibit 1679.4.
203
John Belli Affair
himself to appear by name in a number of documents. Morgan's evi-
dence of his own connection with the John Belli affair is necessarily
brief because it was taken on May 3, 1966, the day before he entered
hospital:1
"Q. Were you a partner of Mr. Walton and Mr. Wagman in respect of
some transactions?
A. Yes.
Q. I refer particularly to the interest which I believe you had in John
Belli Limited, for example?
A. Well, in John Belli, it was — the story in that was that when Mr.
Belli got started with his restaurant, I assisted him in getting on his
feet. There were two other partners at that time, Mr. Shemilt and Mr.
Hunter and myself and in view of the fact that in order to apply for a
licence, which they were attempting to get at that time, some nominee
shares were put in John Shemilt's name. Eventually the company was
taken over by John and the interest I had, which had been turned over
to, I believe it was Chartered Management and Dallas Holdings prior
to that time, was paid out and the cheques representing the money that
had been paid to me on one day was correspondingly paid over to
Dallas Holdings and to Chartered Management, I believe, on the next
day. I believe in my testimony in the examination for discovery I even
produced those cheques and showed them to the Commissioner.
Q. Prior to Mr. Shemilt acquiring your interest which was later the
interest of Chartered Management, did you alone beneficially have these
shares or were you in partnership with Messrs. Walton and Wagman in
respect of your ownership?
A. No. I was in partnership with Hunter and Shemilt and myself.
Walton and Wagman came in later. I believe I was on a guaranteed
loan at the Bank of Nova Scotia. When this was paid off, at that time
I divested my personal interest in them and turned them over to these
two companies I mentioned.
Q. Mr. Wagman, as has been given in evidence, frequently refers to this
account in his working papers and other documents as the Trio account.
To whom is he referring?
A. I couldn't tell you.
Q. Do you say that you had no interest in moneys deposited in this
account?
A. No, I didn't say that. I said they used this account to deposit
moneys in transactions in which we had a third interest each. I never
had any signing authority on this account or actually didn't know of its
existence until it was brought out in the Royal Commission."
'Evidence Volume 26, pp. 3415-7.
204
Chapter VI
Later he added the following :-
"Q. What was the first transaction in which you and Mr. Walton and
Mr. Wagman were partners?
A. I believe it was John Belli.
Q. Were they then partners from the beginning in John Belli?
A. No. When I took it over — I was originally a partner of John Shemilt
and Hunter. But that was changed over and John Belli was kicked out
because he was having his fingers in the till. At that particular time I
turned over the common share interest on a sales agreement with John
Shemilt, and Hunter was a minor partner. My interest was turned over
— I believe the preferred stock was turned over to Chartered Management
and the common stock, I believe, was turned over to Dallas.
Later on when John, who was supervising the restaurant when Mr.
Belli left, kicked over the traces and felt he was doing too much work
and not getting enough benefit and we arranged a pay-out to Chartered
Management and to Dallas which was satisfactory to him."
Since Carl Solomon admitted being the draftsman of the agree-
ment of December 7, 1959 which made Shemilt a trustee for the holders
of the issued common shares, and which seems to have been a dead
letter, and since evidence has been referred to which indicates that the
firm of Solomon & Samuel took over from Crabtree, Crabtree &
Stewart the task of acting as solicitors for John Belli Operations in the
summer of 1959, thereafter acting regularly as solicitors for all parties
to the various transactions which have been noticed, it is reasonable to
assume that this was the first piece of business given to Solomon by
Morgan in the course of a long association. Solomon's evidence given
to the Commission on May 16, 1966, specifically about the John Belli
affair, can be justly described as wary. Two examples of questions put
to him by Mr. Cartwright and myself may suffice:3
"MR. CARTWRIGHT: May I then assume that it was some time prior
to the month of December, 1959, that you commenced to act on behalf
of either John Belli Operations Limited or the principals of that
company?
A. Yes.
Q. And who gave you your original instructions, and who was your
client?
A. From the records, Mr. Cartwright, it would appear my client was
John Belli Operations Limited. The instructions, from the records, I
would assume, came from Mr. John Belli himself at the time.
c
Q. At the inception, did you ever receive any instructions from
Messrs. Walton, Morgan, or Wagman?
"Evidence Volume 26, pp. 3422-3.
"Evidence Volume 33, pp. 4587-9 and 4596-7.
205
John Belli Affair
A. I don't recall any specific instructions. I think from the records it
indicates the reporting letters when sent to John Belli Operations
Limited were sent to Mr. Morgan, and that would be on the instructions
of Mr. John Shemilt.
Q. Mr. Solomon, I would like to deal with this agreement of December
7th, 1959, the draughts and the original backing we have already
discussed. I will produce to you the copy of the agreement in the
record, which is Exhibit number 2087. Can you remember who parti-
cularly gave you instructions to draught this agreement in this form?
A. Mr. Cartwright, I am not sure that I draughted this agreement. I
don't remember having draughted the agreement actually.
Q. Well, I believe you have already identified as Exhibit 2114.1 the
portion of draught form of this agreement.
A. No, I have identified my ink notations on it.
Q. Yes, your ink notations on a draught. Would that be correct?
Further ink notations on the continuation of the draught being yours?
A. Yes.
Q. And two pages of ink writing, being a draught of this agreement.
Would this be correct, sir?
A. Are these the same?
Q. If you would like to compare portions, sir.
A. I would like to. It appears to be the draught of the original
agreement.
Q. In your writing?
A. Yes.
Q. Wouldn't you agree with me that you did, in fact, draught this
agreement of December 7th, 1959?
A. It would appear so. . . ."
"THE COMMISSIONER: I wonder if I could amplify by you telling us,
Mr. Solomon, how you became involved as solicitor for Belli — John Belli
and John Belli Operations Limited.
A. It would be through Mr. Morgan.
THE COMMISSIONER: Yes, and what you say is, in the course of
Mr. Morgan bringing you into this position, you would not know of any
interest he had in John Belli Operations Limited or in assisting Messrs.
Belli and Shemilt.
A. No. At one time, according to the minutes of the company, I was
aware, I think I was aware according to the records that Mr. Morgan
held an interest in John Belli Operations Limited, although the question
was can I now remember whether or not at the time this chattel mort-
gage was signed that Mr. Morgan held an interest, and I would have to
correspond the dates on the chattel mortgage probably with the date of
the minutes and then come naturally to a conclusion."
206
Chapter VI
Irwin Singer, who drew the agreement of July 2, 1963 and reported
upon it to Wagman, said that his instructions came definitely from
Shemilt and possibly from Morgan or Wagman. At no time, according
to him, did any party to it, or indeed any one else, express the view
that its terms were incorrect or not according to the facts.
If justification were needed for exploring events which in scale are
insignificant compared to what must be considered, it may be found in
the fact that most of the elements which are characteristic in all the
transactions of Morgan, Walton and Wagman are present and at an early
date. The use of the trust account of Carl Solomon and his various
partners and of the Trio account, both for the first time, in concealing
the real nature of transactions in which Atlantic money was involved,
are of sufficient significance to require attention. It need hardly be
said that the absolute control exercised by C. P. Morgan over the affairs
of Atlantic and those of Aurora Leasing Corporation was vital to the
making of a profit, however modest, by directing loans to a company in
which he had a substantial interest.
207
CHAPTER VII
The London Complex
This chapter deals with the lending activities of Atlantic Acceptance
Corporation, Adelaide Acceptance and Aurora Leasing Corporation in
connection with the construction and operation of two "shopping plazas"
on the southerly outskirts of the Ontario city of London during the period
from 1961 to 1965, in the course of which, through incompetence and a de-
termination on the part of those who controlled their affairs to prefer their
own interests as individuals to those of the companies concerned, some
$2,500,000 of Atlantic money was irretrievably lost and another half
million so jeopardized that the recovery of any substantial portion of it
is a matter of doubt. In these operations C. P. Morgan characteristically
relied on another young and ambitious lawyer by the name of Donald
Walter Reid who practised in London throughout the period and was
also, like Carl M. Solomon, called to the bar in the year 1958. Involved
in the transactions which are to be related was British Mortgage & Trust
Company in a manner and to an extent which can only be explained by
the close personal relationship between Morgan and Wilfrid P. Gregory,
Q.C., president and managing director of that company, and as a result
of which something in the order of $2,000,000 was risked on doubtful
or non-existent security and of which a substantial part must be con-
sidered as thrown away. For the painstaking and complicated account-
ing analysis which was necessary to expose these transactions the
Commission is indebted to Mr. Orville W. Parkes, C.A., a Londor
partner of the firm of Clarkson, Gordon & Co., who testified over foui
consecutive days of hearings beginning on March 24, 1966.1 Hi?
evidence was preceded by the introduction by Mr. Shepherd of abstract"
'Evidence Volumes 15-8.
208
Chapter VII
of title prepared by the Registrar of Deeds for the County of Middle-
sex, together with a large number of certified copies of instruments
relevant to the inquiry.2
Donald Reid and the Kings
Mr. Parkes' principal task was the analysis of receipts into and
disbursements from the trust account of Donald Reid1 who acted in his
capacity as solicitor at one time or another for all the parties involved
and, for most of the time, for all of them at once. Among his clients
were David Gordon King, a builder, and his father William Arthur
Phillips King, formerly in the trucking business, who was associated with
his son in a company called Dave King Construction Limited. The
solicitors for this company were Messrs. Purcell, Downey, Reid, Mac-
kenzie & Raymond of London, of which Reid, from at least early in 1961,
was most closely concerned with its business and other ventures of the
Kings. The evidence of William King, who at the time he testified before
the Commission was a man of 66 years of age, was that the relationship
between him and his son David and Reid was closer than that of solici-
tor and client and that he regarded Donald Reid almost as a son. At
this time the idea of the shopping centre, a complex of retail premises
housed in one building with space for the accommodation of motor
vehicles in parking areas appurtenant to it, had acquired favour among
speculative builders, and indeed provided for the public, in an era of
almost universal ownership of automobiles, welcome relief from the con-
gestion of vehicular traffic in the central and traditional shopping dis-
tricts of most North American cities and towns. To participate in this
development, stimulated as it was in the area south of London by the
completion of the Macdonald-Cartier Freeway, David King and his
father had commenced negotiations with one Charles Cousins for the
purchase of several acres of vacant land, being part of the southerly
halves of lots 15 and 16 in the Third Concession of the Township of
Westminster, for a price of $60,000 on which they planned to build a
shopping centre with the fanciful name of Treasure Island.
Donald Reid, who first testified before the Commission on March
30, 1966,2 said that the Kings originally received an offer to purchase
these lands from a client of A. E. LePage Limited of Toronto by the
name of Mortex for $420,000, with the provision that Dave King Con-
struction would build a shopping centre on them, but that money was
necessary to buy the lands from Cousins in the first place, and that, since
he had been doing some collection work for Atlantic Acceptance, he
referred the problem to the London branch manager of the company
'Exhibits 1376-1411.
'Exhibits 1433-7.
*Evidence Volume 18.
209
The London Complex
which in due course provided the money on the security of a first mort-
gage and the assignment of benefits under the Mortex offer to purchase.
The conveyance from Cousins to William and Dave King was dated
March 28 and registered on April 10, 1961,3 and they in turn conveyed
to a company of their own called Wildor Holdings Limited. This deed
and a mortgage of the lands to Atlantic were not registered until July 1 1 ,
possibly because the Mortex offer was still under negotiation. It was in
fact rescinded for a number of stated reasons, but probably because the
intending purchaser had discovered the real price of the land. In any
event it is certain that Atlantic provided $70,000 to Reid in trust as an
advance, $60,000 of which was used to complete the purchase from
Cousins. This transaction can no longer be separated from the affairs of
another of Reid's clients, one Frederick Charles Adams, proprietor of
three retail shops in the London area operated by F. C. Adams Limited.
F. C. Adams and Frederick's Department Store
F. C. Adams had recently returned from a holiday in Florida where
he had been fascinated with the operation of stores purporting to sell
goods at a discount, relying on a large turnover and a smaller than usual
margin of profit to produce their income. The achievements of Mr.
Edwin Mirvish of Toronto, operating under the name of "Honest Ed",
and other imitators were a matter of record, and discount stores, like
shopping centres, were popular if not fashionable. Donald Reid put the
requirements of the Kings and the interests of Adams together and with
them approached C. P. Morgan in Toronto. The exact chronology of
these events is obscure and perhaps unimportant, but when Morgan
became aware of the possibilities inherent in the combination of a shop-
ping centre and discount stores he was interested, and testified that
Reid's approach to him coincided with interest of his own in the dis-
count store business, perhaps not unconnected with the fact that William
L. Walton was secretary-treasurer of Ed Mirvish Enterprises Limited.
In any event he determined to talk business with Adams.
Adams was cautious and, in a letter to Reid dated May 31,1 set
down at length his thoughts "regarding our plans and the feeler you
think has been put out from Toronto regarding a new chain corpora-
tion". Referring to the formation of a company he says: "This would
require tremendous assets. For instance for London alone, we would
need working capital of at least $750,000 which I could break down
for you. On top of this our covenant would not be good for the
landlord. Starting from scratch and on a thing like this that has not
been proven, no bank would touch it. I personally, while I think the
idea is sound would not gamble my security on it." He goes on to out-
line the terms on which he was prepared to participate, saying that he
'Exhibit 1378.
'Exhibit 1412.1.
210
Chapter VII
would require approximately $137,000 for his interest in F. C. Adams
Limited on the assumption that it would be acquired by the new com-
pany. He stipulated among other things that he should be president of
the new company, and that he should have the right to hire a general
manager for $25,000. In fact he appeared to do even better, as a letter
from Reid to Morgan of July 3 indicates, setting out the basis of agree-
ment reached in Toronto between Reid, Morgan and Adams a few days
previously. The new company, which had been incorporated in Ontario
as a private company by letters patent dated May 16, 1961, was called
Frederick's Department Store Limited and was, according to this letter,
to pay $250,000 for the preferred and common stock of F. C. Adams
Limited, Adams himself receiving a cheque for $244,232 as late as
November 13 from Frederick's,2 and the balance being paid to his wife
who held the preferred stock. Adams then subscribed for 112,500
shares of Frederick's, at $1 per share for 100,000 shares and $2 per
share for 12,500 shares, and lent Frederick's $100,000 to enable it to
complete the transaction. He thus had $25,000 in cash and was entitled
to 112,500 common shares of Frederick's and repayment of $100,000.
In his letter to Morgan, Reid had enclosed financial statements for
F. C. Adams Limited over the previous three years, and it must have
therefore been clear to the former early in July that the statement for
the year ending December 31, I9603 exhibited a book value for all the
shares of F. C. Adams Limited of $94,000, including an amount of
$25,000 for goodwill, and a profit of only $16,500. Nevertheless,
Adams was reported by Reid to be talking in terms of sales in excess of
$5,000,000 during the first year of operations for Frederick's, and on
July 20, Morgan wrote to Reid4 saying that he had "had a good meet-
ing with the investment people, and I have been assured of a nucleus of
a deal". He enclosed a letter to him from John Frame & Co., signed by
J. A. Brewster, saying that this firm was favourably impressed and
thought an underwriting of $1,400,000 quite feasible. It may be noted
in parenthesis that at this time Frame and Brewster were indebted to
Commodore Sales Acceptance in the amount of some $30,000 which
was never repaid. Morgan continued with a flourish:
"To start it off I think the company should be incorporated publicly
for 1,000,000 shares of N.P.V. not to exceed $2,000,000 (this can be
increased later if need be).
The incorporators should subscribe for 200,000 shares at $1 to put
$100,000 in the treasury.
A purchase agreement with Adams to take over the stores for $250,-
000, payable $150,000 in cash and 100,000 shares should be entered
into. Closing date, say September 15th.
'Exhibit 1429.
'Exhibit 262.
'Exhibit 1413.1. (The figure "200,000" represents a handwritten amendment to the
typewritten "100,000".)
211
The London Complex
Of the 100,000 shares you can rely on me for $75,000, and yourself
the balance of $25,000.
Call 20% payable immediately, and this will put $20,000 in the
treasury for working funds with the balance payable August 15th. Let
Barry know if this is agreeable to you and our cheque for $15,000 will
be sent on to you."
Three pages of handwritten notes found in Reid's files and headed
"Re Frederick's", which Reid subsequently acknowledged to have been
made by him, contained the following memorandum for action made as
a result of this communication.5
"Issue 3 shares common @ $1.00 to:
Frederick Charles Adams
Donald Walter Reid
Karen Audrey Bale.
5. Have K. A. Bale resign as a director and pass resolution approving
the transfer of her share to C. Powell Morgan.
6. Elect C. Powell Morgan a director.
7. Issue shares as follows:
Frederick Charles Adams 100,000 shares @ $1.00
Donald Walter Reid 25,000 shares @ $1.00
C. Powell Morgan (or nominee — see sheet) 75,000 shares @ $1.00
— in denominations of 10,000 shares per certificate and 5,000 shares
per certificate. . . .
9. Issue shares @ $2.00/share according to subscriptions and pass
resolution accordingly."
Frederick's Department Store Limited did have as its first directors
the three persons named in Reid's notes, and in the minutes of a meeting
of shareholders, dated September 29, 1961, C. P. Morgan was elected a
director in place of Mrs. Bale who was Reid's secretary. Supplementary
letters patent dated September 28 increased the common shares of the
company from the original 40,000 to 500,000, apparently pursuant to a
resolution made at a meeting of the board of directors on September 20.
A copy of the resolution may be found in the minute book but no record
of its enactment, and it may here be said that the minute book of this
company and of other companies, for the preparation and maintenance
of which Donald Reid charged very large fees, are a travesty of what is
to be expected from a solicitor in these circumstances. The actual issue
of shares differs from the original conception, as may be seen from
Table 35,6 setting out the names of the shareholders, the amounts paid
by the subscribers for three issues dated October 2, 1961, August 3,
1962 and October 26, 1962 in numbers of shares which were little
changed over the years preceding the company's bankruptcy in 1965.
"Exhibit 1412.3.
•Exhibit 1426.
212
Chapter VII
The largest shareholder on the first issue will be seen to be F. C. Adams
with 105,001 shares, his remaining 7,500 shares being divided between
his wife D. L. M. Adams and his brother F. M. Adams. Morgan's prin-
cipal commitment is shown as held by N.G.K. Investments Limited to
the number of 61,100 shares for a total consideration of $77,200. This
company, as has been seen, was incorporated in December, 1960 to
acquire Mavety Film Delivery Limited from Aurora Leasing Corpora-
tion, was financed very largely by that company and by British Mortgage
& Trust Company and included among its directors and shareholders,
C. P. Morgan, W. P. Gregory and C. G. King. Morgan, in addition,
was issued 10,000 shares at $1 per share, Carman King, 10,000 shares
at $2, Kathleen Christie 10,000 shares at $2 per share, W. P. Gregory
5,000 at $2 per share, Harry Wagman 10,000 shares at $1, W. L.
Walton 10,000 at $1 and 3,000 at $2 and D. W. Reid 25,001 shares at
$1 and 5,000 shares at $2. It is noticeable that in this issue only F. C.
Adams, C. P. Morgan, N.G.K. Investments Limited for 45,000 of its
shares, D. W. Reid, Walton and Wagman were permitted to subscribe
at the price of $ 1 per share. Reid maintained in his evidence before the
Commission on March 30, 19667 that his sole beneficial interest was in
the 5,000 shares purchased for $2 a share, and that the remaining
25,000, other than the one qualifying share which was apparently never
paid for, were held by him for William and David King. There were in
all, issued to some 46 shareholders, 350,003 shares for a total consider-
ation of $500,000. Minor acquisitions and transfers occurred on August
3, 1962, and the sole result of the third issue on October 26 of that year
was the purchase of 108,414 shares at a price of $1 by N.G.K. Invest-
ments which thus increased its holdings to 169,514 shares for a con-
sideration of $185,614, making a total investment of $612,997 for
463,000 shares.
Frederick's started to operate on November 2, 1961 with high
hopes for the coming Christmas season, and its promoters contemplated
a national chain of discount stores in the immediate future. The com-
pany's net profit for that season was $15,573.53, achieved by the simple
but dubious expedient of deferring the cost of 80% of its executives' and
buyers' salaries in the amount of approximately $88,800. But a heavy
forfeit was soon to be exacted, for in the thirteen-month period ending
January 31, 1963, Frederick's recorded a net loss on operations of
$485,865. Moreover its auditors, Clarkson, Gordon & Co. insisted on
writing down the value of its investment in F. C. Adams Limited from
$250,000 to $88,349, a revaluation which might have been foreseen and
was rendered all the more necessary by the fact that this company lost
$17,300 in 1962. Frederick's total loss for the period, including the
deferred expenses and allowance for bad debts, amounted to $720,300.
TEvidence Volume 18.
213
The London Complex
The financial statement, revealing for the first time that the entire equity
of the shareholders had been wiped out in the course of little more than
a year, was not released until June 14, 1963 and the delay must repre-
sent a severe struggle between management and the auditors, finally won
by the latter, which resulted in their losing the audit, thereafter entrusted
to Wagman, Fruitman & Lando.
Reid and the Adelaide Acceptance Debenture
The increased investment of N.G.K. Investments in October, 1962
appears to be all that transpired from a proposal to issue rights to exist-
ing shareholders at $ 1 per share forecast in Adams' address to the annual
meeting of shareholders held on July 31, attended by seven of them in
person, including D. W. Reid, who is shown as holding 30,001 shares,
and at which an operating loss of $200,000 had been projected. All
hope of a successful public issue of shares had by this time been aban-
doned and several economies instituted. On October 26, the day of the
second N.G.K. subscription, the directors considered and accepted
(C. P. Morgan declaring his interest) an offer by N.G.K. Investments
to secure temporary financing in the amount of $600,000, for which a
fee would be payable of $25,000, and authorized the execution of a
debenture in favour of Adelaide Acceptance Limited to secure that sum,
repayable April 30, 1964 with interest at 9% per annum and collaterally
secured by forty promissory notes, each in the amount of $15,500.1 This
debenture, which provided for a floating charge on the assets of Fred-
erick's, was registered by Reid in the office of the Clerk of the County
Court for the County of Middlesex and not in the Corporate Securities
Registration Branch in Toronto, where alone registration could have
secured priority for Adelaide Acceptance over other creditors without
actual notice. When Reid was examined before the Commission as to
why this was done and the security of Adelaide imperilled, he claimed that
he was not acting for Adelaide and that the meaningless registration in
the County Court office was "in accordance with his practice". From
the proceeds of the loan he nevertheless deducted $3,000 as a fee, the
size of which was out of all proportion to any work required to be done
for a borrower under these circumstances and can only be justified by
work done to secure the position of the lender and on its behalf, charge-
able of course to the borrower in any event. There is in evidence a
letter from Reid, dated October 31, enclosing the debenture and saying
amongst other things: "Please have the Affidavit of Bona Fides taken
and return the debenture in duplicate to this office. We will then attend
to the registration of the document in the office of the County Court
Clerk for the County of Middlesex in accordance with your instruc-
tions". On the office copy,2 bearing Reid's initials for "Reid and Mc-
^xhibit 257.
'Exhibit 1413.3.
214
Chapter VII
Killop", under which style he was now practising, is a handwritten note
dated November 2 as follows: "Morgan advised us by phone that his
solicitors in Toronto would handle registration (T.O.) after approval.
R." Among handwritten notes of Reid's which outline action to be
taken in connection with the whole transaction3 occurs the legend:
"Debenture in name of Adelaide Acceptance Limited. Ont. Co. H.O.
Toronto. Reg'd. in County Clerk office only". Reid insisted that this
note supported his contention that he acted in accordance with his in-
structions, but Morgan in his final testimony to the Commission said that
Reid, and no other solicitor, was acting for Adelaide Acceptance in the
matter and had charged a substantial fee for what he did. I accept
Morgan's evidence in this respect since he had no reason to perjure him-
self on the point, and largely because it is inherently probable, just as
the handwritten note about Morgan's telephone message on the copy of
Reid & McKillop's letter of October 3 1 is inherently improbable, since
there was nothing in the body of the letter to suggest that the writer was
aware of the requirement to register in the Corporate Securities Regis-
tration Branch. Having reached this conclusion, I must also infer that
Reid's handwritten note was added to his copy of the letter after he
realized years later, and as a result of action taken by the trustee for
Adelaide Acceptance, that he was liable for any loss that that company
would sustain as an unsecured creditor of Frederick's because of failure
to make the proper registration. This unfortunately is not the only ex-
ample of Reid's readiness to manufacture evidence in exculpation of his
own dereliction of duty.
Adams' Report and Resignation
By the end of 1962, Adams had no more stomach for the affairs of
Frederick's. In the first week of January, 1963 he prepared a "Report
on Operations for 1962", a copy of which was sent to Morgan. Since
Adams was the only merchant of the three directors of the company, and
in order to appreciate the full measure of the folly which ensued, it is
desirable that this report be quoted in full:1
"As shown by the attached interim Profit and Loss Statement for the
year 1962, we will show a total loss of $357,252.36 before depreciation.
Of course the showing may be a little better or worse after an actual
physical inventory.
As you already know, at the beginning of 1962 we were organized to
proceed with the opening of further stores without delay and, therefore,
were carrying far more staff than this one store should have had. This
was cut drastically in July, taking full effect in August and has been
kept to a minimum since that time.
•Exhibit 1412.4.
'Exhibit 1430.
215
The London Complex
In 1963 we could expect to make the following savings in expenses
as compared to 1962:
Salaries $ 55,000.00
Legal Audit and Professional Fees 1 0,000.00
Advertising 20,000.00
Rent 13,555.00
Insurance 4,500.00
$103,055.00
Beginning in October of this year we were hit very hard by the open-
ing of the new Sayvette Store. I estimate that this cut our sales by
about 180,000 to 200,000 during the last three months of the year.
Therefore, while normally we should expect to decrease 20%, during
1963, because of this new major competitor I really feel we would pick
up any decrease we take from this source in the last months of 1963,
and come out with sales of about 1,500,000.00, the same as 1962,
providing we are properly stocked.
Since mid July, when we made the decision that plans to expand must
be dropped and our staff and expenses reduced to absolute minimum,
we have cut everything as close as possible and I, therefore, can see no
opportunity for any major improvement in this area in 1963. I must,
therefore, figure on operating costs in 1963 of about 60,000 a month,
or 720,000 for the year, barring any presently unforeseen expenses.
When you figure the following are absolute essentials, that I cannot
change, it does not leave much to hire staff and run a store on.
Rent $110,000.00
Financial Advice 12,500.00
Interest— 9% on $600,000 54,000.00
Payment to Aurora 83,100.00
Business Taxes 5,634.00
Heat, Light, Water & Phone 26,704.00
$291,938.00
I feel that realistically we cannot figure on better than 30% gross
after mark-downs for the year. Therefore, if we can only do 1,500,-
000.00 volume we can only make 450,000.00 gross. With minimum
expenses of 720,000.00 to 750,000.00, we must show a loss of 270,-
000.00 for the year 1963.
Since there are about 300 shopping days a year, this means that I
feel it will actually cost a capital loss of about $1,000.00 for each day
we stay in business.
You asked me to come up with something that could save this busi-
ness and actually there is no answer I can give that is possible within
our financial structure. We are fighting tough competition and are too
weak to really compete.
216
Chapter VII
To make a profit this store must do $3,000,000.00 a year. In order
to have any chance of doing this the following would have to take place:
(1) We would have to have sufficient capital to put from One to One
and a quarter million dollars worth of stock in the store, so we could
build very strong staple departments and maintain them in complete
assortment at all times. Our competitors have this much well assorted
stock or more at all times, even now in January they have a beautiful
assortment well displayed, while we have nearly bare counters.
(2) We would need something like 50,000 to 75,000 to develop and
upgrade our fixtures so that we could display our new stock as well as
they do.
(3) We would need the balance of the shopping centre finished and
opened to attract more customers.
(4) We would need a system of customer credit so we could advertise,
'Just say charge it', the same as they do, with the first thirty days at no
interest. To do this we would have to spend money to train personnel
and also to have control forms developed and printed. We would also
need a monetary fund of about 100,000.00 to carry it until we could
develop bank credit.
(5) We would have to have enough confidence in the final success of
the plan to over spend for a time on advertising and training of depart-
ment help.
(6) The extra capital would have to be procured in a manner that did
not kill our chances, before we got started, with interest or other charges.
(7) Our financial affairs would have to be put in order, to the point
where we could give information freely to the credit institutions to give
firms some confidence in supplying us. At present we find it impossible
to deal with much of the market because of rumors and the fact that a
supplier can get no sound information on our position.
To do all this, it would be necessary to re-finance our present position
and get another million and a half in capital, on common stock or a
debenture issue.
Without doing the above I can see no possibility of ourselves develop-
ing from our present position to a profitable organization.
Since six weeks after our opening, I have not been in a position to
allow the buyers to actually go out and build our departments.
Since I cannot see any possibility of our being able to re-finance our
company as outlined above, it only leaves us three choices.
( 1 ) Have a selling out sale and try to unload and pay off our creditors.
This would not work as we could not raise enough money to clear our
debts.
(2) Sell the business on some kind of a stock exchange to a company
with a strong enough capital and personnel structure to develop it.
( 3 ) Declare bankruptcy.
217
The London Complex
I personally, therefore, can offer no solution, nor can I put myself in
the position of carrying on and taking a group of small suppliers down
the drain with us. In our present position I do not feel I can justify to
myself sending my men out to buy goods I know we cannot pay for.
Maybe if I were not here you could re-organize with a different presi-
dent in order to save the company or sell it.
I am, therefore, attaching my formal resignation to this report.
Yours truly,
Mr. F. C. Adams."
This was accompanied by a letter of resignation, dated January 10,
as president of Frederick's Department Store Limited, F. C. Adams
Limited and Frederick's Petroleum Limited, and as a director of all
three companies, addressed to the board of Frederick's with a copy to
D. W. Reid. Adams' resignation was accepted. Exactly a year before
he had been repaid his loan of $100,000 to Frederick's and he was not
permitted to retain the 100,000 shares which represented from the begin-
ning most of the inflated value of F. C. Adams Limited as an asset of
Frederick's. In Morgan's phrase, when Adams flung his resignation on
the former's desk there were six or seven people waiting outside to see
that he was "black-jacked" into giving up these shares, for which no
certificate was apparently ever issued in his name and which, according
to Reid, Adams simply brought in and left with him in accordance with
Morgan's instructions. However this was accomplished, a letter of
October 10, 1963 from Reid to Morgan2 attached two lists of the share-
holders of Frederick's in which Adams is shown as holding only 7,501
shares, the missing 100,000 being recorded as held by "Reid & McKillop
in trust". Although the share records indicate that Adams by subscrip-
tion had been issued 107,501 shares, it may be doubted that he ever
thought he was entitled to 100,000 of them.
Further Advance of Atlantic Funds
In the face of these formidable losses Frederick's none the less
continued to operate. It had originally borrowed a total of $500,000 in
1962 from Commodore Sales Acceptance, and $50,000 from Atlantic
Acceptance was lent to F. C. Adams Limited, which in turn lent it to
Frederick's while pledging its shares to Atlantic as security. For the half
million lent by Commodore Sales Acceptance only notes were given.
The $600,000 obtained from Adelaide Acceptance was used on October
31 to pay off Commodore Sales Acceptance and Atlantic loans and the
balance of $50,000 was paid to Reid & McKillop, who retained $3,000
as the fee previously referred to and paid the balance of $47,000 to
'Exhibit 1413.2.
218
Chapter VII
Frederick's. Thereafter, the company borrowed only from Aurora
Leasing from which it had already rented its store equipment at a
monthly rental of $6,925, commencing December 1. 1961. ] Beginning
with a loan of $50,000 on September 16, 1963. the balance in favour of
Aurora reached its high point in November, 1964 at $466,500 and at
January 4. 1965 stood at $366,500 plus arrears of interest, the total
indebtedness as at the date of bankruptcy being $403,879.70. Through-
out the period Aurora, through letters signed by W. E. Pahn. sought to
collect principal and interest on this debt, interest on the Adelaide deben-
ture, and the N.G.K. Investments finder's fee with one hand, and with
the other made additional unsecured advance-, to Frederick's from which
arrears on existing indebtedness were paid. Aurora's commitment did
not end there, since it was also financing the purchase o\~ Frederick's
shares by N.G.K. Investments.1' For the period ending January7 31,
1964. Frederick's lost $331,607.06. leaving the shareholders equity,
after wiping out all the contributed capital, in a deficit position of
$422,936.20. Nevertheless on November 13, 1964, Pahn is found writ-
ing to Olver, Adams' successor, as follows:
'"As per Mr. Morgan's instructions we are forwarding herewith cheque
for $52,500.00 along with 9% demand note for like amount payable to
Aurora.
Would you please sign and return the note at your earliest conven-
ience, along with your cheque for $2,455.08 representing interest due to
Aurora as of November 1st, 1964."
At the end of the previous fiscal year Frederick's owed Aurora
$109,000 and, in spite of its disastrous record, the Aurora loans were
increased by the end of November, 1964 to $466,500. No financial
statement for the year ending January, 1965 has been found, but Fred-
erick's statement of affairs in bankruptcy, dated July 15. 1965. shows an
additional operating loss from February 1, 1964 to that date of approxi-
mately $554,000 and a balance sheet deficiency of $1,069,000 which.
when added to the loss of the capital contributed by the shareholders of
Frederick's, becomes a total loss in round figures of S 1 .680,000. Aurora's
share of its total liabilities of $1,327,000 was $403,879 and Adelaide's
$600,000, secured by its inadequately registered debenture. On the
assumption that Adelaide ranks as an unsecured creditor, creditors gen-
erally may expect to realize 15c on the dollar and if. as appears unlikely.
Adelaide is found to be secured, no other creditor will receive anything.
Wildor Holdings Limited
The necessity of following in general outline the affairs of Fred-
erick's Department Store has had hitherto the effect of postponing con-
sideration of those oi Wildor Holdings Limited over the same period, and
'Exhibit 1441.
'Exhibit 1246.
219
The London Complex
its brief history must now be noticed in some detail. It was incorporated
oy Ontario letters patent dated March 31, 1961 on the application of
William and David King and Donald Reid, specifically to hold the lands
on which the Treasure Island Shopping Centre was to be built, the
undated conveyance of which was registered in the County of Middlesex
Registry Office on July 11, the Kings as grantors being described as
trustees for the grantee.1 The building plan for the shopping centre con-
sisted of two phases: the first for a unit for the housing of stores, the
second for a recreational centre consisting of bowling alley, curling rink,
and restaurant. Dave King Construction Limited was to be the contractor.
The first advance from Atlantic Acceptance, when the project was in its
infancy and the land virtually untouched, has already been alluded to
as has the dilatory registration of the first mortgage from Wildor to
Atlantic on July 11 to secure $1 50,000, 2 bearing interest at \Vi% per
month. Another mortgage, dated September 12 and registered on Sep-
tember 15, was given by Wildor to Atlantic at the same rate of interest
to secure $250,000 payable on October 1. This was financing of an
expensive short-term type, given to a company owning a few acres of
vacant land with no contributed capital on the instructions of C. P.
Morgan who had other fish to fry in the promotion of Frederick's Depart-
ment Store, as Wildor's principal tenant at a rental of $125,000 per year.
The problem was to find money for the Kings to cover the expenses of
building the first phase of the shopping centre to a point where Fred-
erick's and other tenants could open for business, and Wildor could
obtain long-term financing for the completion of the project and the
paying off of the interim lenders. It is a familiar problem in the specu-
lative construction business which obviously appealed to Morgan in his
chosen role as "secondary banker", apart from the interest which he had
in the future of Frederick's. Another shareholder of Frederick's, also
interested in interim financing of builders, was W. P. Gregory who had
steered his own company, formerly a conservative mortgage lender on
existing buildings, into the financing of construction where risks, although
high, might be profitable. The mortgage manager of British Mortgage
& Trust Company was W. A. Pike, a young man who had joined it upon
leaving school and had become the personal assistant and confidant of
Gregory's father, Mr. W. H. Gregory, when he had been president of
the company, and had risen to the position of mortgage manager in the
course of this association. He was also to be a shareholder of Frederick's,
and it was to him and W. P. Gregory that Reid applied for further
interim financing in contemplation of the necessity of discharging the
Atlantic mortgages on October 1 .
1Exhibit 1379.
'Exhibit 1380.
220
Chapter VII
Reid Applies for a Mortgage Loan to British
Mortgage & Trust Company
Reid's letter of September 27, 1961, one of the last he was to write
as a member of the Purcell firm, is useful as a summary of the situation
of Treasure Island as it was at the time, and of the hopes of its promoters
for the future.1
"Dear Mr. Pike:
Further to our recent meeting with you, we are pleased to enclose
statement of revenue and expenditures for Wildor Holdings Limited for
the first five years commencing in the year 1962. These pro forma state-
ments are drawn in order to reflect the net cash position of the company
at the end of each year.
The principal tenants for the shopping centre are as follows:
Frederick's Department Store Limited (triple A)
Busy B Discount Foods Limited, which is a new company, and a
wholly owned subsidiary of Loblaw Groceterias Co. Limited. The
Loblaw covenant is included in the lease, (triple A)
Bata Shoe Stores Limited (triple A) with the additional covenant
of Kent Shoes
Atlantic Acceptance Corporation Limited (triple A)
Clatworthy Lumber Company Limited
Peter Faclaris — restaurant
Reitman's Ladies' Wear
Tip Top Tailors
Hunt's Bake Shop and Candy Store
Barber shop and beauty parlour
Phifer Books and Gifts
Babyland Furniture
Paul Sheffield — jeweller
Maternity Shop
Candy and nut store
Curling Rink
Treasure Island Bowls Limited
In addition to the above leases which have been arranged, negotia-
tions are being finalized for a dry cleaning pick-up store, service station,
bank, sporting goods store, and paint store. We will give you the names
of these tenants as soon as the leases have been finalized.
The main leases in the shopping centre are for a period of twenty-five
years with others for a period of ten years with a five year renewal
clause. We have negotiated no leases less than ten years up to this time.
You will note that the rental income shown on the statement of
revenue and expenditures increases slightly in 1964. This is due to the
Exhibit 1414.1.
221
The London Complex
fact that certain of the leases have slightly accelerated rents at that time.
In addition, you will note that no allowance was made for lighting or
maintenance of the parking lot area. In this connection, the tenants are
paying 110 per square foot for parking lot lighting and maintenance,
including snow removal, in addition to the rents shown. We submit that
the 110 per square foot figure is more than adequate to look after this
expense.
All of the leases include an acceleration clause with respect to land
taxes. In addition, the rentals shown are minimum rentals only and
most of the leases include percentage clauses up to six per cent of gross
sales. The department store lease does not have a percentage clause and
the supermarket lease has a percentage clause of one and one-half per
cent of gross sales or the minimum rental included in the rental income
figure shown on the statement.
We should point out to you that the statement of revenue and expendi-
tures has been prepared keeping in mind an interest rate on the first
mortgage of seven per cent in the one instance, or seven and one-half
per cent in the second instance.
Treasure Island Bowls Limited is a company that will be controlled
by the wives of the principals in Wildor Holdings Limited, with only
qualifying common shares to be issued, and the balance of the shares
to be held by way of preferred shares in the name of Wildor Holdings
Limited in order to circumvent The Related Companies Act.2 There-
fore, Wildor Holdings Limited controls the income from the bowling
alley as well as the rental income and a pro forma statement prepared
by the Double Diamond Bowling Alley people is enclosed for your
information.
The constructions costs of the buildings are estimated to be as follows:
Phase 1
department store and supermarket
80,000 square feet at $9.00 per square foot $720,000.00
20,000 square feet at $14.00 per square foot 280,000.00
Phase 2
90,000 square feet at $10.00 per square foot .... 900,000.00
Land improvements including paving, storm sewers, sanitary sewers,
fill, gravel, flood lights on lot, stand pipe water storage, pumps, water
well, water mains, transformer vault, etcetera — $250,000.00.
The land is valued by the owners at $400,000.00 and has been
appraised for this figure and set up on the company books accordingly.
An Ontario group has offered to purchase the land at a price of $420,-
000.00 and this has been refused by the present owners, as they wish
to retain ownership of the shopping centre.
Wildor Holdings Limited owns the land at the present time subject
to $240,000.00 temporary financing which was obtained from Atlantic
Acceptance Corporation Limited. The first phase of the development
There was and is no such statute.
222
Chapter VII
is within two weeks of completion and all current accounts have been
paid by the developers together with the said funds that have been
obtained from Atlantic Acceptance Corporation Limited. Approxi-
mately twelve acres of the sixteen acre parking area has been prepared
for paving, all underground wiring is completed and the footings for
the light standards are in and ready for the erection of the light standards
themselves. Three walls of the first phase are completed and most of
the roof is on. The terrazzo tile floor has been partially poured and
the contractors are continuing their work in spite of a slight delay that
was encountered due to a strike of steel workers.
The company would like to arrange mortgage financing in the amount
of $1,800,000.00 to finance the project, and is prepared to give assign-
ments of leases to strengthen the company covenant. We understand
from our discussion with you that it would take a few weeks to obtain
definite approval of a mortgage loan of this size and, consequently, in
the meantime, the developers would consider accepting temporary
financing in the amount of $750,000.00 for a term to be suggested by
you as the minimum term for which you would wish to make the loan.
We would be pleased to have you attend in London to inspect the
property and the building which is now under construction, and if there
is any further information that you require, please do not hesitate to
call on us. We might mention that Wildor Holdings Limited banks with
The Toronto-Dominion Bank, Main Branch, London, Ontario, and the
principals are well known to Mr. Powell Morgan, President of Atlantic
Acceptance Corporation Limited. Please feel free to contact either of
these institutions for reference.
We will look forward to hearing from you at your early convenience."
Pike's reply of September 29 expresses at least some of the doubts
which would have occurred to an officer of a trust company dealing at
arm's length with the applicant:3
"Thank you for your letter of September 27th. The details provided
are appreciated but there are some questions we would like you to
answer for us before we make our decision.
1. Which of the tenants you have listed will have space in Phase
1?
2. How much annual rent will these tenants pay?
3. How much cash are your clients providing, or have they pro-
vided for the erection of the buildings and the initial purchase
of the land?
4. Where will the cash be secured for the erection of Phase 2?
We were very disturbed after reading the financial statement of
Wildor to see that the assets are so small for such a large venture. This
leads us to ask for answers to 3 and 4 above.
"Exhibit 1414.2.
223
The London Complex
Your letter suggests that Frederick's will be a triple A company.
Would you please provide statements to prove this?
The writer intends to visit the project within the next two or three
days. Answers to the above questions will therefore be appreciated just
as soon as possible."
The financial statement that Pike refers to is not the five-year pro-
jection of income and expenditures mentioned as an enclosure by Reid
but another document prepared by Rafuse, Ford & Keast, accountants in
London, undated but prepared as at August 1, 1961, showing current
assets of Wildor Holdings as $24 cash and "sundry receivables of $1,064".
The fixed assets consist of "land at appraised value" of $400,000, "build-
ing under construction at cost" $65,986.82, "deposit on equipment pur-
chases" $1,000, and organization expense of $628.50. The liabilities
show accounts payable and outstanding cheques of $2,660, the loan
payable to Atlantic Acceptance in the amount of $126,016.32 and
4,200 common shares issued at $340,003. Notes to the statement indi-
cated that the value of the company's land was in accordance with an
appraisal by Richardson Real Estate Limited, but failed to comment on
this asset not being shown at cost with a separate entry for appraisal
surplus. The 4,200 common shares were all the authorized common
shares at that time, and the value of $340,003 attributed to them is
mathematically unintelligible, unless the $340,000 was the appraisal
surplus above the actual cost of $60,000 and the remaining $3 the value
attributed to the shares of William and David King and Donald Reid.
It is certain that no money was paid in for any of them.
No reply was ever made to Pike's letter by Reid in the sense of an
answer to the questions raised. Pike must have visited the property and
resolved his doubts, because on November 1, Reid & McKillop received
an advance from British Mortgage & Trust Company for Wildor Hold-
ings of $499,300, pursuant to a mortgage, dated October 30, to secure
$750,000 with interest at 12% and due November 1, 1962.4 This
mortgage was not registered on title until November 23. In the mean-
time, Reid, through his trust account and acting at one and the same
time for both the borrower and lender and as trustee for each, disbursed
these funds by paying $50,000 to Wildor Holdings on November 8, and
$309,503.42 to Atlantic Acceptance on November 10, the sum of its
advances to date to Wildor Holdings together with accrued interest; on
the same day a further payment was made to Wildor Holdings of
$100,000; on November 14, $5,000 was transferred to the general
account of Reid & McKillop; on November 17, $25,000 was paid to
Frederick's Department Store, $25 to J. E. Farncomb and a further
$5,000 to Wildor Holdings; and on November 21 La Verne Richardson
was paid $3,000 and Ronald Richardson $1,500, leaving a balance in
♦Exhibit 1382.
224
Chapter VII
the account of $271.58. The payment to Frederick's of $25,000 was
characterized as "extras settlement". The payments to La Verne and
Ronald Richardson are described on the trust account ledger as "gra-
tuity", the recipients being principals of Richardson Real Estate Limited
which, as already noted, was responsible for the appraisal of the Wildor
land at $340,000 above its cost price. Whatever the words "extras
settlement" were designed to convey — it is an expression which implies a
payment to Dave King Construction Limited in respect of extra work
done — the money was used to subscribe for 25,000 shares of Frederick's
issued to Reid which he claimed to hold entirely for William and David
King. On this transaction he testified to the Commission as follows on
March 30, 1966:5
"Q. Were you, yourself, a shareholder of Frederick's?
A. Yes.
Q. Just to abbreviate things, did you acquire, apart from the one quali-
fying share, 25,000 shares at one dollar a share — apart from the one
qualifying share did you purchase 25,000 common shares at one dollar
per share and 5,000 common shares at two dollars per share?
A. Yes.
Q. Is that correct?
A. Yes.
Q. Were you the absolute owner of the 25,000 shares which you
purchased at one dollar?
A. No.
Q. Did you have any beneficial interest as owner in any part of those
shares, the 25,000 shares issued at one dollar?
A. No. I had an absolute interest in 5,000 shares at two dollars.
Q. For whom did you hold the 25,000 shares purchased at one dollar?
A. David King, William King.
Q. From what source did you pay $25,000 into Frederick's to acquire
those shares?
A. I don't specifically recall the —
Q. Would it assist you to look at the trust ledger, Mr. Reid?
A. Yes, it would, Mr. Shepherd.
Q. I direct your attention to Exhibit 1433, Section B, a cheque of the
17th of November, 1961, if my memory serves me, and I show you an
entry 'To cheque of Frederick's', beside which has been written 'extras
settlement', $25,000. Do you recall that that is the cheque which paid
Frederick's for the 25,000 shares?
A. I don't recall specifically, Mr. Shepherd, that that was the cheque.
'Evidence Volume 18, pp. 2549-55A.
225
The London Complex
Q. Let me show you the cheque. I direct your attention to cheque No.
1025 to Frederick's Department Stores Limited, $25,000, re British
Mortgage. Do you recall what that cheque was paid for?
A. I don't specifically. The thing that is confusing me is the word
'extras' that is written in there.
Q. That is confusing me, too. First, if I could pursue the $25,000
question. You paid $25,000 to Frederick's on behalf of Messrs. King,
is that correct?
A. Yes.
Q. From what source did you pay it?
A. From Messrs. King; but I can't specifically point to a cheque.
Q. What information do you require or what records would you like to
consult to assist the Commission as to the source of that money?
A. The records of Frederick's, I suppose, would undoubtedly reflect the
fact that these shares were paid for.
MR. SHEPHERD: May I have Exhibit 1451.
Q. I have some records of Frederick's, Mr. Reid.
A. Yes.
Q. I show you Exhibit 1451, being a deposit slip of the Frederick's
Department Store relating to a deposit made by K. A. Bale. Who is
K. A. Bale?
A. She was my bookkeeper at the time.
Q. She is depositing $235,000. A part of it is shown as D. W. Reid,
$25,000, beside which has been pencilled '23'. Do you see that?
A. Yes.
Q. And 23 has been pencilled against F. C. Adams?
A. Yes.
Q. Does that assist you?
A. That shows $25,000 was paid but what the reference to 23 — I am
sorry, it is so long ago.
Q. It is all right, Mr. Reid. Look at the records, we have lots of time.
A. Mr. Shepherd, is there any other $25,000 item shown in any of the
trust ledgers?
Q. No, there is not, Mr. Reid; that is the only $25,000 which is paid
into Frederick's from your trust account.
A. Well, but for the notation of 'extras' I would probably assume that
that is the thing.
Q. The book I am looking for is apparently still in the library but I put
it to you that it is shown on the books of Frederick's as a credit to share
subscriptions receivable. Do you recall now that that sum was paid in
respect to these shares?
226
Chapter VII
A. The sum of $25,000 was received by me and was paid from monies
received in trust to Frederick's. The only point of confusion that I see
is saying to you today that that $25,000 item you showed to me is the
one that was for the purchase of the shares. There is no doubt in my
mind I received the monies and there is no doubt in my mind I paid
them out as directed.
Q. Did you receive the monies from British Mortgage & Trust in con-
nection with an advance for Wildor Holdings Limited and paid the
money out of that fund on the direction of Mr. King to Fredericks?
A. It is quite possible, Mr. Shepherd, yes.
Q. Do you agree that it is so?
A. I can't swear that it is so.
Q. Do you know of any other amount of $25,000 which you made to
Frederick's?
A. No, I don't recall any specific payment of $25,000.
Q. Do you know of any other source from which Messrs. King would
be in a position to or did in fact pay you $25,000 for this purpose?
A. Messrs. King had certain other assets, sir. I don't know of any
specific payment that was made from any other source of funds.
Q. This is a payment out of your trust account?
A. Yes, sir.
Q. Can you assist us as to what you made the payment for?
A. The $25,000 payment you have pointed out to me?
Q. Yes.
A. No, sir, I can't.
Q. Can you assist us as to who wrote the words 'extras settlement'
against that entry?
A. No, sir, I can't.
Q. Is it in your handwriting?
A. No, it doesn't appear to be.
Q. But British Mortgage & Trust were advancing funds, were they not,
against construction as it proceeded at the centre?
A. Yes.
Q. And did they come and make inspections, and the like, before
advancing?
A. Yes, I assume they did.
Q. I presume they would advance something less than 100 per cent of
the value of the construction?
A. I would assume that would be the case.
227
The London Complex
Q. Did you discuss with Mr. King the propriety of paying out of this
mortgage financing funds to purchase for him shares in Frederick's
when workmen on the project were unpaid?
A. I don't specifically recall any such discussions.
Q. Where did you consider that the funds would be available to pay
the cost of construction, other than from British Mortgage & Trust? Was
that the only source of income — of monies that Wildor had?
A. I would think so, Mr. Shepherd."
Reid agreed that disbursing this advance from British Mortgage &
Trust Company before registering the mortgage to it was unusual, and
thought that it might have been an oversight. But his conduct towards
this client was curiously consistent. On November 15 he wrote to the
company reporting the deposit of its cheque on November 1, adding
"therefore interest should run from that date", saying that he was with-
holding his report pending receipt of "the discharge of the Atlantic
Acceptance Corporation Limited mortgage" and concluding: "We report
that all the documents are in order and will be forwarded to you together
with our report".6 Then on December 1 1 he reports to the trust com-
pany, and to the attention of Pike in the following terms: "We certify
that you are the registered owner of a first mortgage identified as
follows ... In our opinion the mortgagor has a good marketable title
to the lands described in the said mortgage". A duplicate of the regis-
tered mortgage is enclosed, together with other documents, and the
mortgagee is advised that releases from Frederick's and Busy B have
been assigned to it, construction in connection with "phase two" is well
under way and: "Our clients would appreciate a further inspection by
you and a further advance of funds under this mortgage". In fact the
two mortgages from Wildor Holdings to Atlantic Acceptance had not
been discharged, and the chance discovery of this drew the following
remonstrance from Pike dated December 27:
"We were very surprised today to be told by a solicitor who searched
title this morning that our mortgage on the above property is registered
behind one to Wildor Holdings and another to Atlantic Acceptance. We
are quite sure that there is some reasonable explanation but it does seem
peculiar that you certified to us in your letter of December 1 1th that we
hold a first mortgage and later we find out that it is a third mortgage."
To this Reid opposed a front of brass and on the next day replied:
"We report that we had no hesitation in certifying title in this matter
to you since we paid off the two prior mortgages registered in favour of
Atlantic Acceptance Corporation Limited before advancing funds under
your mortgage. There was some delay in receiving the executed dis-
charges from Atlantic's solicitors in Toronto, however, we did not hesi-
•Exhibit 1445.
228
Chapter VII
tate to certify title to you in our letter of December 11th, 1961, because
we, in fact, paid Atlantic Acceptance Corporation Limited all moneys
owing to it under the said mortgages. We trust that this clarifies the
situation for you."
Apparently it did, because British Mortgage proceeded to give a dis-
charge of its existing mortgage from Wildor and to take a new one, dated
February 2, 1962, to secure $1,500,000, bearing interest at 11% per
annum and due February 28, 1963, which was registered on February
9,7 and to double its advances to Wildor Holdings to an aggregrate
amount of $1,200,000 before the discharges of the latter's mortgages
to Atlantic Acceptance, dated January 25, 1962, were finally registered
on February 14, and not until an additional $165,000 had been
advanced by Atlantic and repaid out of moneys advanced by British
Mortgage & Trust Company, with accrued interest of $4,000, on Feb-
ruary 8.
Reid's Evidence of the Payment to W. A. Pike
The examination of Reid's trust account, in so far as it concerned
Wildor Holdings, disclosed a payment of $5,000 on February 15, 1962
to "K. A. Bale" out of funds provided by British Mortgage & Trust, for
which no explanation had been found by Mr. Parkes and which Mr.
Shepherd thought he should pursue in his examination of Reid. The
result, although not entirely unexpected, produced a sensation out of
all proportion to the financial importance of the transaction, and cast
light on the motives of the principal actors to such an extent that the
circumstances must be carefully considered. Counsel returned to the
matter immediately, following that part of his examination of Reid
already quoted, and it should be said that the latter was represented by
counsel in the person of Mr. John Sopinka of Toronto, who had at the
beginning of the examination made a general objection to disclosing
what he considered to be privileged communications between his client
and the Kings, and had been advised by me to make specific objection
as the examination proceeded.1
"Q. Well, on that same exhibit, 1433, Mr. Reid, if you would look at
section B, page 2, the bottom entry, 15th of February, 1962, cheque
to K. A. Bale, cash. Do you see that entry?
A. Yes.
Q. Do you see that entry?
A. Yes.
Q. 15 February, K. A. Bale, cash, $5,000?
A. Yes, sir.
'Exhibit 1384.
'Evidence Volume 18, pp. 2555B-9A.
229
The London Complex
Q. Is it Mrs. Bale?
A. Yes.
Q. Did Mrs. Bale take a cheque drawn on the trust account and cash
it?
A. Yes.
Q. And what did she do with the cash?
A. She gave the cash to me and I, in turn, gave it to one of the Kings,
and I don't know which one. Is there a copy of the cheque here, Mr.
Shepherd?
Q. Yes. If you will look, it is cheque 1 117. It is at the very top of one
of the pages.
A. Yes.
Q. Have you got it there?
A. Yes. And it is noted, 'To obtain cash re Wildor direction'.
Q. It is, 'British Mortgage, to obtain cash re Wildor direction'?
A. Yes.
Q. Do you recall which King you gave it to?
A. No, sir.
Q. Did you obtain a receipt for it?
A. I don't know, sir.
Q. Do you have any receipt in your possession, so far as you are aware
at this time?
A. No.
Q. On whose instructions did you make the payment to?
A. Well, it would be on Wildor Holdings Limited, according to the
notation on the cheque. I don't know which officers of Wildor or
whether it would be both.
Q. Did you discuss with Mr. King what he was going to do with $5,000
in cash?
MR. SOPINKA: Mr. Commissioner, this is one stage I would take the
position he was obviously obtaining instructions from a client and unless
there is a ruling that the privilege does not apply I would object to the
question.
MR. SHEPHERD: It would be my respectful view, Mr. Commissoner,
that such a communication is not a communication made for obtaining
professional advice. The leading case is Minter v. Priest, wherein the
protection accorded to communications between solicitor and client is
looked at only from the point of view of communications passing from
the client to the solicitor solely for the purposes of obtaining profes-
sional advice or the communication passing from the solicitor to the
230
Chapter VII
client in giving such advice. For an officer of a client to come to a solici-
tor's office and obtain from a trust account standing in the name of the
company of which such man is officer the sum of $5,000 in cash is not,
in my respectful submission, a communication falling within the rule.
It would be my view, and 1 do respectfully submit, that what Mr. King,
whichever Mr. King it was, told Mr. Reid he wanted that $5,000 for
is not a communication for the purposes of obtaining professional
advice, particularly not with respect to the funds of Wildor. It does
not fall within the rule and I respectfully submit the witness should be
directed to answer it.
THE COMMISSIONER: Have you anything to say in reply to that,
Mr. Sopinka? I think Mr. Shepherd has correctly stated the substance
of the view stated in Minter v. Priest, which was a judgment of the
House of Lords, I think in 1930.
MR. SOPINKA: That is certainly the holding in that case. I have read
the case, Mr. Commissioner. If it is so held that the solicitor and client
privilege does not apply we will have to answer the question.
THE COMMISSIONER: I so rule and ask Mr. Reid to answer.
THE WITNESS: Repeat the question, Mr. Shepherd, please?
MR. SHEPHERD: Did Mr. King, whichever Mr. King it was you gave
the money, inform you as to purpose he required $5,000 in cash out of
the trust account of Wildor?
A. I was informed the cash would be handed to Mr. William Pike.
Q. Can you identify Mr. Pike for us?
A. Mr. Pike was an employee of British Mortgage & Trust. I do not
know the purpose for the payment.
Q. Mr. Pike was the mortgage manager, was he not, of British Mort-
gage & Trust?
A. Yes.
Q. Did you pursue at all with Mr. King for what reason Mr. Pike would
be getting $5,000 in cash from the trust account of a borrower from
British Mortgage?
A. I don't recall a specific discussion, Mr. Shepherd.
Q. I wonder if you could search your recollection, Mr. Reid, and assist
us as to which King this was? Did you normally deal with the father or
the son?
A. They were both in and out of the office many times a day, Mr. Shep-
herd, and I really don't recall.
Q. Did you ever have any further discussion with Mr. Pike, for example?
A. No.
231
The London Complex
Q. Whereby it appeared whether or not he had in fact received the
money? When did you first hear that this money was required? When
in relation to the day you paid it out?
A. Probably on the day that I paid it out. I don't specifically recall,
other than Mrs. Bale was contacted in the last day or so in connection
with this and she called me and I returned her call. She indicated she
had been questioned about it and her recollection was that she went to
the bank before three o'clock and got this money on my instructions
and sometime later that afternoon the monies were delivered. . . ."
Mrs. Bale had evidently called Reid on the telephone after being inter-
viewed by one of the Commission's investigators and, after these circum-
stances had been clarified, the examination continued:2
"Q. But back at that time, back in 1962, from whom did you first hear,
for the first time, that $5,000 in cash was required?
A. From someone in an executive position in Wildor Holdings.
Q. Was it a King?
A. Yes.
Q. Do you recall whether the conversation first took place in your
office?
A. No, I don't, Mr. Shepherd.
Q. Did you ever advert to the matter again in conversation with any-
body?
A. I don't recall any specific discussions about it.
Q. Did you ever think it proper to inform Mr. Gregory, the President
of the Company, that it was your understanding that such a payment
had been made?
A. No, sir.
Q. You never did, in fact, inform him?
A. No. sir.
Mr. Shepherd, I do not for a moment suggest that the payment was
improper. I do not know.
Q. I appreciate you have said you do not know for what purpose it was
paid. I think you have also said you cannot suggest any reason from
your knowledge of Wildor as to why William Pike would be receiving
$5,000 from that company. Is that correct?
A. Yes."
Further Evidence from David King
David King, who was called as a witness on the following day,
recalled a meeting in Reid's office in which Reid had said that the pay-
ment of $5,000 to Pike was necessary in order to obtain the next advance
Evidence Volume 18, pp. 2559C-D.
232
Chapter VII
at a time when advances from British Mortgage & Trust had been slow-
ing down. Reid, he said, had pointed out that the building was half
finished, that money was needed and that the payment to Pike had to
be made. Subsequently Reid informed him that Pike "had been taken
care of" and that an advance of about $200,000 was then forthcoming.
An advance of exactly $200,000 was in fact paid to Reid & McKillop
on February 23, 1962, raising the total amount to $1,400,000. But in
the course of this evidence David King was much more specific about
another payment of $5,000 to Pike, in connection with an advance
received from the trust company for the construction of the King Shop-
ping Plaza on Hamilton Road, an enterprise of the King family not con-
nected with Atlantic Acceptance or any of its subsidiary companies. His
evidence as to this referred to the payment out of Reid's trust account
recorded on a ledger sheet entitled "British Mortgage & Trust Company
loan to King, William A. re Hamilton Road Shopping Plaza", and show-
ing a cheque to William A. King in the amount of $5,000 negotiated on
September 6, 1962. He said that Reid telephoned, saying that Pike was
in his office and David King and his father were to come down. Reid
told them upon arrival that he had an advance on their mortgage which
he would like to pay out to them, and that Pike was building a house and
would like $5,000 to enable him to finish it. Thereupon Reid made a
cheque payable to William King who took it downstairs to a neighbour-
ing branch of the Toronto-Dominion Bank in temporary quarters, and
returned with five $1,000 bills. Reid expostulated about the size of the
bills on the ground that they could be traced, so William King returned
to the bank, brought up smaller bills and invited Reid to count them. He
did so and handed them to Pike, whereupon the Kings were told to
return the following day to get their advance, and withdrew, leaving
Pike and Reid together in the office.
Bribes Admitted by Pike in Evidence
Pike appeared before the Commission on April 4, 1966 and was
represented by counsel. He gave a circumstantial account and it should
be quoted:1
"Q. When an application for a substantial mortgage secured by com-
mercial property came in, did it come to you first?
A. Almost always.
Q. And then what did you do with it?
A. I would take it to the managing director and —
Q. Is that Mr. Wilfrid Gregory?
'Evidence Volume 21, pp. 2925-32.
233
The London Complex
A. Yes, Mr. Gregory. And then it would be presented to the Board of
Directors and later to a committee of the Board of Directors when the
special committee to deal with the weekly business was set up.
Q. Were you required to make any preliminary investigations of the
matter?
A. If the application came from our Toronto branch, usually all the
investigation had been done. Anything which originated in the Stratford
area we would investigate from the Stratford office.
Q. Did you have any discretion as to what you sent on to the executive
committee or did you send on all applications to the executive com-
mittee?
A. No, not all applications. Some were turned down by myself.
Q. When you did send them on to the executive committee was it any
part of your duty to make any recommendation?
A. No. I was never asked for a recommendation except that I think it
was considered that once it had gone across my desk, well, it would not
go farther than my desk unless it did bear my recommendation.
Q. Do you recall Wildor Holdings Limited borrowing money from
British Mortgage & Trust secured by a mortgage on a shopping centre
in London known as Treasure Island?
A. Yes.
Q. Did you personally receive any money from Wildor Holdings Limited
in respect of that mortgage?
A. Yes, sir.
Q. How much did you receive?
A. A total of $10,000.
Q. Did you receive these funds in cash or by cheque?
A. In cash.
Q. In how many payments did you receive the funds?
A. In two.
Q. Were they equal payments?
A. Yes.
Q. $5,000 each?
A. Yes.
Q. How did this arrangement come to pass? What was the first con-
versation or correspondence which related to you receiving money?
A. I am not sure exactly when it happened but Mr. Reid came to my
office, and when I say I am not sure it is because I don't know whether
it was when we had the mortgage of $750,000 or when that mortgage
234
Chapter VII
was increased to $1,500,000, and Mr. Reid indicated that $10,000
could be made available if the application could be approved.
Q. When you say your office, Mr. Pike, where was your office at that
time?
A. At that time it was at 10 Albert Street, Stratford.
Q. Is that a different place from where the British Mortgage office is
now?
A. Yes, the new building is at 1 Ontario Street.
Q. How did the subject come up?
A. Mr. Reid broached the subject to me.
Q. And what was it again, please?
A. That if the application — and this I think is the one that increases
the mortgage — if that application could be approved, that the money
could be made available to me.
Q. What was your reply to that?
A. I accepted.
Q. Did you inform any of the officers of British Mortgage & Trust of
that arrangement?
A. No, I did not.
Q. Then when was the first payment, to which you have referred, in
fact, made?
A. It was made in February, 1962.
Q. And who paid you?
A. I believe it was the senior Mr. King.
Q. Where was this payment made?
A. Stratford.
Q. Where in Stratford?
A. I believe it was in our office on Albert Street.
Q. What conversation took place on that occasion?
A. I don't honestly recall any conversation.
Q. Were you paid in cash?
A. Yes.
Q. Do you recall anything about the size of the bills or anything at all
about the payment?
A. No, I don't, except that 1 imagine they were in $20 or maybe $50
denominations.
235
The London Complex
Q. Did Mr. King come by prior arrangement? That is to say, did you
expect him on that day?
A. I don't know, sir. I would imagine that I would expect him to come.
Q. You don't recall whether there was any discussion with anyone
about whether or not he would come on that particular day?
A. No, sir, I don't recall this.
Q. When was the second payment made?
A. In September of the same year.
Q. Where was that made?
A. That was made in Mr. Reid's office in London.
Q. Who was present on that occasion?
A. Mr. King and his son and Mr. Reid and myself.
Q. What were you doing in London on that day?
A. I was inspecting the Treasure Island Gardens building at the time.
Q. Did you meet with Messrs. King and Mr. Reid for this purpose by
prior arrangement?
A. I don't know whether it was by prior arrangement except that I do
know that when I went to London that day that Mr. Reid knew that I
would be there and that I would be calling at this office.
Q. When you got there who was present?
A. I believe it was just Mr. Reid and later we were joined by the two
Mr. Kings.
Q. What happened after the two Mr. Kings came?
A. Mr. Reid, I have forgotten whether he or one of his girls wrote a
cheque which was signed to Mr. King and Mr. King Senior went down-
stairs and cashed it and came back to the office and gave an envelope
to Mr. Reid who opened it and indicated that the thousand dollar bills
should not be given and so Mr. King returned to the bank and came
back again with another envelope.
Q. Do you recall how many thousand dollar bills there were?
A. I saw one. I don't know how many there were.
Q. Had you ever seen a thousand dollar bill before?
A. No, sir.
Q. Was there any discussion about a thousand dollar bill?
A. No, just that as it was drawn from the envelope, that it shouldn't
be passed out.
Q. Then when Mr. King returned what did he have?
A. He had a white envelope which he, I believe, gave to Mr. Reid.
236
Chapter VII
Q. You have said that Mr. King went away?
A. Both the Kings left the office shortly after this.
Q. I am referring now to the occasion when Mr. King came back and
he had one thousand dollar bill at least, and you said he went away and
then did he return again after that?
A. Yes. He took that envelope and went away and came back and
gave an envelope to Mr. Reid.
Q. And then what was done with the money?
A. I believe the money was counted at the time, replaced in the
envelope, and before I left I received the envelope.
Q. Do you recall the size of the bills after Mr. King had made the
change?
A. I think once again that they were in denominations of $50 and less,
maybe $100.
Q. Who left the office first, the Messrs. King or yourself?
A. The Kings.
Q. Who gave you the money?
A. Mr. Reid gave it to me.
Q. Were the Kings still there when he gave you the money?
A. No, sir.
Q. Did you keep all the money for yourself or did you share the money
with anyone?
A. No. It was all mine. I kept it all myself.
Q. Did anyone else at all, apart from your own solicitor in recent days,
did anyone else at all other than the two Mr. Kings and Mr. Reid and
yourself know of this arrangement at any time?
A. Not to my knowledge, sir.
Q. Have we dealt with this matter adequately, Mr. Pike, or is there
any other observation you would like to make or any other evidence
you wish to give touching the matters we have dealt with?
A. No, I think it has been covered fairly and thoroughly."
Mr. Sopinka, again appearing for Reid, thereupon applied to ex-
amine the witness, and since the consequences of this testimony were
bound to be serious for his client, I permitted him to do so, Mr. Shepherd
making no objection. His questions were mainly directed towards estab-
lishing that the second payment of $5,000 was made in respect of the
King Shopping Plaza and not of the Treasure Island Centre, but Pike
adhered to his statement that it was the second instalment of a promised
payment of $10,000. A former alderman of the City of Stratford and
senior officer of the Canadian Junior Chamber of Commerce, Pike gave
237
The London Complex
his evidence with complete candour, and was in due course convicted on
two counts of taking a bribe as an agent under section 368( 1) (a) (ii) of
the Criminal Code by Magistrate D. B. Menzies on May 18, 1966 at
London, sentenced to two months' imprisonment and fined $1,000.
Reid Re-examined: His Counsel Cross-examines the Kings
Reid was recalled immediately following this evidence and claimed
the protection of section 5 of the Canada Evidence Act and section 9
of the Evidence Act (Ontario), subject to which he was directed to
answer counsel's questions. Mr. Sopinka again asserted the privilege
attaching to communications between the Kings and Reid in the matter
of the second payment arising from a meeting, alleged by Reid to have
been held on August 24, 1962, in which the propriety of bribing Pike
was discussed, and at which, according to Reid, he had produced the
Criminal Code and warned the Kings against such a course.
I have no hesitation in describing this evidence as a fabrication since
it was based upon purported entries in Reid's diary which was said to be
available but was not produced, and because, if Reid had in fact gone to
the trouble of advising the Kings on this question of criminal law, he
would not have participated in the meeting of September 6 when the
actual bribe was given. In any event no privilege can attach to a com-
munication between solicitor and client made in furtherance of fraud or
crime, and the witness was directed to answer further questions. Reid
denied "emphatically" Pike's account of the approach made in Stratford.
He admitted drawing a cheque for $5,000 on his trust account from
moneys of British Mortgage & Trust deposited therein for the benefit
of King Shopping Plaza and handing it to William King who then re-
turned with the cash, and that, after a discussion between the Kings and
Pike with respect to the denominations of the bills involved, William
King had again left the office and returned. He believed that the pur-
pose of the payment was to facilitate the making of advances under the
mortgage to British Mortgage & Trust Company. Immediately thereafter
William King was called to testify, and he denied giving any money to
Pike on either of the two occasions in question, but asserted that Reid
had raised the subject many times. He recalled the circumstances under
which Karen Bale had been given a cheque for $5,000 by Reid, and
admitted going to Pike's office in Stratford to fetch or deliver papers at
Reid's request on several occasions. As to the second payment on Sep-
tember 6, he described in detail his two trips to the bank, the first to
obtain five $ 1 ,000 bills and the second to have them reduced to smaller
denominations. He said further that Reid counted the money "bill by
bill" and handed it to Pike. In response to questions put by Mr. Sopinka
he admitted that he might have delivered an envelope to Pike on one of
his visits to Stratford, but said he was not aware of its contents. At the
238
Chapter VII
conclusion of this evidence Mr. Sopinka applied to postpone his exam-
ination of David King to enable him to examine the evidence already
given and make suitable preparation, and to this I agreed. The exam-
ination took place before the Commission on April 25, 1966 and was
principally directed to the payments to Pike.1 David King denied, as had
his father, having received any warning from Reid in relation to the pro-
visions of the Criminal Code and otherwise corroborated his father's
evidence in general outline. It is unnecessary to pursue the details of
this evidence further since Reid was tried and convicted by His Honour
Judge B. J. S. MacDonald on July 14, 1967 under section 368 (1) (a)
(i) of the Criminal Code on two counts of bribing an agent, and was
sentenced to 12 months' imprisonment and to pay a fine of $5,000. His
appeal to the Court of Appeal was dismissed in the following year and
leave to appeal further was denied by the Supreme Court of Canada.
Financial Difficulties of Wildor Holdings
By April 9, 1962 the British Mortgage & Trust mortgage of
$1,500,000 was fully advanced and it appeared that permanent financing
in the amount of $1,800,000 by Coronation Investment Company
Limited, repayable over a period of twenty years, was in prospect on
completion of the Treasure Island centre. Although the latter loan was
agreed to, to the point of an executed commitment of both Coronation
and Wildor, it never materialized, probably because of non-completion of
the shopping centre owing to a strike and a fire, and perhaps because of
the fact that British Mortgage & Trust had an assignment of leases from
Wildor Holdings, also required by Coronation, and was not likely in the
near future to forego its only means of repayment. On September 13,
Pike wrote to Reid & McKillop, expressing regret that British Mortgage
& Trust Company could not see its way to increasing its investment and
stating that the initial commitment was made "with some small amount
of reluctance as this was considerably more than we have ever loaned in
the past". He referred to the fire which had resulted in the loss of valu-
able tenants, and, in particular, to the establishment of another discount
store at a neighbouring site which might be expected to have a detri-
mental effect on Treasure Island.1 This, no doubt, was the Sayvette oper-
ation in premises owned by South London Corporation Limited which
was to play an important part in the later stages of Atlantic's investment
in this area.
The time to test Reid's resourcefulness was at hand. The building
operations of Dave King Construction, although apparently diligently
pursued, had been hampered by its lack of resources and its complete
dependence upon advances to Wildor Holdings. Revenue from the
shopping centre leases was being collected by the mortgagee for the
Evidence Volume 24.
'Exhibit 1414.6.
239
The London Complex
repayment of interest and the property was encumbered by mechanics'
liens to the extent of over $300,000. Moreover A. E. LePage Limited
had brought an action against Wildor Holdings which had been settled
by the latter giving a second mortgage to the plaintiff for $60,000. In a
private and confidential letter to Morgan on September 14 Reid wrote
as follows:2
"Dear Powell:
Re: Wildor Holdings Limited
We were informed by Fred Adams that you would like to be furnished
with details of Wildor Holdings Limited and that there is a certain
amount of interest on your part of purchasing the company.
We should point out to you that the writer has no further personal
interest in this company, and we have accordingly contacted Messrs.
King and have been furnished with a one year statement of revenue and
expenditures, a copy of which is enclosed for your information. We are
informed that the asking price for the finished shopping centre is
$2,400,000.
We suggest that a meeting either in Toronto or in London be arranged
between you and the Kings to discuss this matter further.
As a personal note, the writer regrets that he has not seen you for
some time to discuss the various businesses in which we have common
interests, however, you will appreciate that there has been a very dim-
cult health problem that we are attempting to overcome. We trust that
we will be able to get together with you in the not too distant future.
We send our kindest personal regards."
The lienholders obtained judgment for $311,496.35 on October 22. It
was not until January 29, 1963 that Reid wrote another private and
confidential letter, this time to W. P. Gregory, in the following terms:3
"We understand from our discussions with Mr. C. P. Morgan that the
sale of Treasure Island Shopping Centre could be carried out by British
Mortgage & Trust Company exercising its Power of sale as contained
in clause three, page three of the mortgage.
Messrs. Clarkson Gordon & Co., Chartered Accountants, have audited
the books of Dave King Construction Limited and Wildor Holdings
Limited on behalf of the lien holders and execution creditors, and have
found the books to be in order. Mr. John Robinson, a resident partner
in the Clarkson Gordon & Co. firm, has indicated to Mr. King that
the lien holders and execution creditors have pretty well abandoned
hope of recovering any of the monies owing to them in connection with
this shopping centre, and that in all probability they will be delighted
to accept a settlement of ten cents on the dollar.
In view of this, we suggest that if you are in agreement, Mr. Robin-
son be notified by you that British Mortgage & Trust Company has
decided to sell the property by private sale under its Power of Sale con-
'Exhibit 1412.6.
•Exhibit 1414.8.
240
Chapter VII
tained in its mortgage and that the best obtainable offer is in the amount
of $1,700,000.00. The purchase monies would be applied firstly to
satisfy the indebtedness to British Mortgage & Trust Company and the
balance would be available for distribution among the lien holders.
The mortgage registered in favour of A. E. LePage Limited does
not present an immediate problem as it is not in default at this time and
in addition it contains a covenant to postpone in favour of a new first
mortgage.
We understand that Mr. Morgan has discussed in detail with you
the plans for the shopping centre and we feel that it is imperative for
us to act in this matter immediately in order to best protect the interests
of your Company, Atlantic Acceptance Corporation Limited, and the
shareholders of Frederick's. We will, therefore, appreciate your co-
operation in this matter.
We attempted to contact you by telephone today to discuss this matter
with you, however, we were unable to reach you. If you feel that a
telephone discussion would be of value please do not hesitate to call
the writer. We will look forward to hearing from you and in the mean-
time we send you our kindest personal regards."
The statement that Clarkson, Gordon & Co. had found the books
of Dave King Construction Limited and Wildor Holdings Limited to
be in order referred to a report made to the creditors of Treasure Island
Shopping Centre on January 4 which, after advising them that the firm
had not been allowed to inspect Reid's trust ledgers referring to the two
companies, estimated the realizable value of their consolidated assets
from the creditors' point of view at $4,133.76. Mr. Parkes, who signed
the report, concluded as follows: "British Mortgage & Trust Company
will under no condition advance sufficient funds to complete phase two
of the shopping centre. The mortgage company has reconsidered its
plans to foreclose and now indicate that they will act under a forced
sale clause in their mortgage and apply to the Court for power to sell
the shopping centre with any excess proceeds being turned over to the
Court to be distributed to the second mortgage holder and the lien
creditors". An application to the Court was not, of course, necessary,
but it is interesting to observe what in fact happened in purported com-
pliance with the recognized procedure.
British Mortgage & Trust Exercises its Power of Sale
At a meeting of the board of directors of British Mortgage & Trust
company on February 26, 1963 the problem of Treasure Island Shopping
Centre was considered and the following minute records the board's
decision:1
"The mortgage is now overdue and there are substantial arrears of
interest. For some time we have been collecting rents from Frederick's
'Exhibit 109.
241
The London Complex
Department Store and Busy B Groceteria which amounts have been
applied on account of arrears. Sale proceedings have been instituted by
our solicitors and offers will be accepted after March 4, 1963. At
present our investment plus interest and miscellaneous disbursements is
in the neighbourhood of $1,670,000.00 and will increase slightly before
a sale could be effected. Two valuation reports have been ordered and
while they have not yet been received, verbal reports would indicate that
they will be in the range of $1,500,000-$ 1,600,000.
It was moved by Mr. A. B. Manson, seconded by Dr. H. B. Kenner
that after due consideration this Board of Directors set the reserve bid
on this property for the purposes of sale at $1,700,000.00."
One month later to the day the board considered three tenders, the
first mentioned being from Zema Development Limited in the amount of
$1,200,000 with an accompanying letter increasing the offer to
$1,450,000, the next from A. E. LePage Limited, as trustees for a
company to be incorporated, for $1,655,200 and a third from Donald
Walter Reid as trustee for a company to be incorporated in the amount
of $1,801,000. Of these offers the first was not accepted since it was
the lowest received, the second was not considered acceptable because
of conditions attached to it and the third was accepted in the following
terms, as appears from the minute: "Authorize the managing director to
accept the offer of Donald Walter Reid, as trustee, subject to negotiation
of terms of payment and particularly the mortgage we would take back.
It was pointed out that British Mortgage cannot take back a mortgage
of $1,500,000, this amount being in excess of two-thirds of value." Next
day Pike wrote to Reid & McKillop, to the attention of Donald W. Reid
in the following terms:2
"The Offer you were good enough to make on behalf of your clients
for the purchase of the above property was considered along with two
others at the meeting of our Investment Committee yesterday. Your
Offer was the highest.
It is noted that a condition of your Offer is that British Mortgage
take back a first mortgage of $1,500,000. It did not occur to the writer
when you visited our office early this week that a mortgage of $1,500,-
000. of the Offer you submitted would be an illegal investment. As you
know we are not permitted to lend more than 66% % of the value.
There is no doubt that the purchase price will indicate the value.
The maximum first mortgage we would be able to consider would be
$1,100,000.
In view of this you may want to reconsider the purchase price and
submit a new Offer. If you do so I hope you will be able to send a
cheque for 10% of the purchase price and try to make arrangements
to complete the sale as of April 1st so that you will get credit for rents
due that day.
•Exhibit 1416.2.
242
Chapter VII
If you think you could complete the purchase with a mortgage of
$1,100,000. I would recommend that you get another Offer to us
before the end of this week. I realize this is asking for pretty fast work
but it is imperative that this matter be settled at once."
Reid accordingly made a second offer to purchase for a total of
$1,700,000, as originally contemplated, and the deal was closed; a con-
veyance under power of sale was made by British Mortgage & Trust to
a company by the name of Treasure Island Properties Limited, dated
April 26 and registered on April 30, 1963.
Several aspects of this transaction must be considered. Reid
admitted that these offers had been discussed with the British Mortgage
people at Stratford, but was careful to say that only the current position
of the loan and the minimum amount which the trust company would
accept had been dealt with. Wilfrid Gregory, in evidence given to the
Commission on April 27, 1967, said that he knew both Morgan and
Reid were interested in purchasing the shopping centre and that he was
glad of this because disposal had become a problem, but that all the
discussions with Reid had taken place with Pike and that he was not
aware of the terms of Reid's offers until they were received.3 Morgan
testified that he had discussed with both Reid and Gregory the desir-
ability of acquiring Treasure Island for the shareholders of Frederick's in
March of 1963, and said that the first offer to British Mortgage & Trust
of $1,801,000, with the expectation of a mortgage back of $1,500,000,
was based on the fact that he considered $300,000 all that Atlantic
should invest, the second offer being reduced to $1,700,000 in the hope
that he would not "have to come up with the money".4 Reid's notes,
always informative,5 show the original figure of $1,700,000 crossed out
and supplanted by the figure of $1,801,000; by their juxtaposition with
other notes, dealing with the planning of an addition to the Treasure
Island Centre to provide for a hockey arena on lands at the northeast
corner of the original Wildor property still owned by Cousins, they
appear to have been made in the month of March before the first offer
was made to British Mortgage & Trust. Reid's second offer of
$1,700,000 involved the giving back of a mortgage to British Mortgage
& Trust for $1,100,000, or two-thirds of the valuation of $1,700,000
to comply with the provisions of the Loan and Trust Corporations Act,
and a balancing figure after adjustments of $588,498.83, set down in
handwritten notes in the trust company's files opposite the legend "figure
phoned to Mr. Morgan by W. Pike on April 24/63 - 2.30 p.m."
sEvidence Volume 116.
"Evidence Volume 25.
'Exhibit 1417.1.
243
The London Complex
Treasure Island Properties Lease to Treasure Island Gardens
Treasure Island Properties Limited was incorporated as a private
company by letters patent in Ontario on April 26, 1963. The applicants
for incorporation were Elizabeth Crisp, Carl Morton Solomon and Irwin
Singer and the signatures on their application were witnessed by D. W.
Reid in each case. Like Wildor Holdings, its issued capital stock
amounted to three one-dollar shares which were apparently never paid
for, but were transferred in January 1964 to John L. Menzies, an
associate of Reid in the practice of law, Roy Bonnie, the last manager of
Frederick's, and E. B. Bishop, the manager of the hockey arena, Menzies'
share being eventually in April 1965 endorsed in blank. To this com-
pany Aurora Leasing Corporation advanced on April 29, through Reid
& McKillop, the sum of $650,000 for which it received a second mort-
gage on the Wildor lands to secure $800,000 at an interest rate of 10%
per annum, dated April 25 and registered on April 30, the whole amount
to be due and payable on April 30, 1964.1 The interest rate of 10%
must be considered unusual in the face of the 1 1 % rate charged on the
first mortgage, as also the total amount secured under the two mort-
gages, which was in the aggregate $1,900,000, in view of the fact that
the British Mortgage & Trust evaluation of the land and buildings was,
as has been seen, somewhat less than $1,700,000.
The descriptions of the lands contained in these two instruments
are confusing, but it is reasonably clear that Aurora's mortgage was only
intended to cover the original lands on which the shopping centre stood,
and which were appurtenant to it, as conveyed to Wildor Holdings.
British Mortgage & Trust's security included, or was intended to include
the additional parcel amounting to 1.88 acres which has been referred
to above. Reid's notes2 show that, at the time of writing, the method by
which this parcel was to be conveyed from Charles Cousins was still in
doubt, as the word "nominee?" below a rough sketch of the property
indicates. In due course he selected his sister-in-law, Mrs. Julia E. Faust,
to purchase this wedge-shaped landlocked parcel, which lay athwart the
site of the proposed hockey arena, from Cousins for $6,000 on April 23,
and to convey it to Treasure Island Properties for $100,000 four days
later, both instruments being registered on April 30. On the same day as
this remarkable transaction, which will be referred to again, notice of a
lease3 between Treasure Island Properties Limited and another company,
named Treasure Island Gardens Limited, was registered, announcing that
such a lease of the 1.88 acres had been executed and some additional
lands, amounting in all to fractionally more than two acres. No con-
temporary copy of this lease has ever been found, although Reid testified
to his belief that one had once been in his files. What does exist is one
1Exhibit 1396.
•Exhibit 14L7.1.
'Exhibit 1393.
244
Chapter VII
in which the date April 29 has been typed in, and at the end of which,
over the space reserved for execution, has been pasted a piece of paper
headed as follows, "In witness thereof the parties of the First and Second
Part have hereunto fixed their Corporate Seals duly attested by the
hands of their authorized signing officers in that behalf this fourteenth
day of December A.D. 1965 to replace the original Indenture of Lease
dated the 29th day of April A.D. 1963 which cannot be found," and
subscribed to by R. L. Bonnie and E. B. Bishop as president and vice-
president of both companies.4 By the terms of this document Treasure
Island Properties purports to lease to Treasure Island Gardens Limited
a private Ontario company similarly incorporated on April 26, 1963
with three common shares, issued at $1 each and unpaid, the said parcel
of slightly over two acres for a period of 99 years at an annual rental of
$40,000. Should the rental payments under this lease of what, at the
end of April 1963, was vacant land be in arrears for a period of over ten
days, the landlord was entitled to re-enter and repossess it. Thereupon
Treasure Island Gardens mortgaged its leasehold interest, defeasible as
it was on these precarious terms, to Atlantic Acceptance for $500,000
for a period of one year from April 29 with interest at 10%, and by
September 16 this loan had been fully advanced, commencing with a
payment of $100,000 to Reid & McKillop on the day of execution of
the mortgage.
The End of Wildor Holdings
Before pursuing the history of the Treasure Island complex, now
committed to embrace a hockey arena, something further must be said
about the demise of Wildor Holdings Limited. The files of the Depart-
ment of the Provincial Secretary indicate that Donald Reid took care to
advise it, in a letter of June 16, 1962, that he had resigned as a director
in favour of Robert John King, but the company never filed any returns
under the Corporations Information Act or paid any filing fees, and Reid
advised the department in November 1963 that it was out of business.1
For its default in this respect its charter was cancelled on January 21,
1965. It was asserted by David King that Reid's resignation was to en-
able his firm to act for the Kings against the holders of liens registered
against the Wildor lands. Statements as to the financial affairs of Wildor
were frequently promised by Reid but never forthcoming. The books of
account of Wildor appeared one day in the construction office of Dave
King Construction, all the ledgers being filled out in the same hand and
in the same coloured ink and apparently at the same time, the Com-
mission's information being that this was done by the accountant Keast
overnight at the request of Reid. Reid denied that he had in his posses-
sion the Wildor minute book or other corporate records, but. subsequent
'Exhibit 1394.
'Exhibit 447.
245
The London Complex
to his giving this evidence to the Commission, he produced in his office
unbound minutes to the Provincial Police. These can only be described
as fragmentary, and, together with some handwritten notes made by
Keast, were introduced by the Crown as evidence in Reid's trial on June
14, 1967. The accountant's notes, which he said were dictated to him
over the telephone by Reid, give specific numbers of share certificates
from 4 to 21, dividing up 4,197 common shares of Wildor Holdings
equally among Reid and the two Kings. Reid maintained both before
the Commission and at his trial that he had originally decided to take a
one-third interest in Wildor Holdings in lieu of legal fees, had decided
against it in the summer of 1961 and had "divested himself" of this
interest, continuing to hold one share in trust which the minutes show
was eventually transferred to Robert John King. All of this is perhaps
of little importance except as it bears upon the $25,000 of Wildor's
money advanced by British Mortgage & Trust which was used to
purchase 25,000 shares of Frederick's Department Store in the name of
Donald Walter Reid on October 2, 1961. Reid's version of this trans-
action has already been quoted and the Kings maintained that these
shares represented a joint interest on the part of Reid and themselves.
Morgan at all times believed that the 25,000 shares were Reid's in
accordance with the original agreement with Reid and Adams as to the
initial investment in Frederick's, saying that he would not have consented
to the landlords having any share interest in the latter company.2 The
Wildor books of account set this up as a loan to W. A. P. King and
eventually to Dave King Construction Limited. As late as 1965 David
King is to be found pressing Reid for the division of these shares and
the delivery to him and his father of certificates representing the one-
third share of each of them. By this time the Kings had become
nuisances. On April 8, 1965 David King wrote to Reid a letter drafted
by Purcell, the latter's former partner, in the following terms:3
"PERSONAL AND CONFIDENTIAL
Mr. Donald W. Reid,
Barrister & Solicitor,
365 Richmond Street,
LONDON, Ontario.
Dear Sir:
I have been unable to reach you by telephone for the last three weeks;
consequently forcing me to write this letter.
As you know you hold in trust equally for my father, W. A. King,
myself and yourself (25,000 shares at $1.00 each and 5,000 shares at
$2.00 each) a total of $35,000.00 worth of shares of Fredericks
Department Store Limited.
sEvidence Volume 25.
'Exhibit 1875.
246
Chapter VII
My father and I have never received written trust acknowledgment
but you verbally stated that you hold the shares in trust as above set
out and your statement was made in the presence of Mr. Morgan, Mr.
Wagman and Mr. Purcell and at that time you also stated that you
would see that my father and I would get our certificates. I would like
you to give me immediate acknowledgment of the trust and I would
like you to have the share certificates split three ways and have my
father's shares and my own delivered to us.
I would appreciate the trust acknowledgment by return mail on or
before April 15, 1965 and the shares as soon as they can be trans-
ferred.
Yours truly,
Dave King"
To this he received the following reply:4
"We acknowledge receipt of your letter of April 8th, 1965. The
information contained therein is not correct.
Yours truly,
REID, MENZIES and CREIGHTON
Per 'D. W. Reid' "
Thereafter King tried unavailingly to get Reid on the telephone
and eventually told the latter's receptionist that, if he did not hear from
Reid immediately, he would take steps to compel delivery of his shares.
This produced the following letter from Reid, dated May 12: 5
"WITHOUT PREJUDICE
Mr. Dave King,
74 Hunt Club Drive,
London, Ontario.
Dear Sir:
We understand that you telephoned our offices today making some
sort of threat and acting in a very rude manner. Please refrain from
any such telephone calls in the future.
We have refused to discuss anything with you until all of our out-
standing accounts have been paid in full. You were advised of the fact
that we are exercising a solicitor's lien on any and all documents relating
to any of your business which may be held in this office. We have every
intention of adhering to this position.
Your conduct and belligerent attitude have been mysteries to the
writer for some time. Every effort was made to help you, and you
apparently have no conception of the services rendered to you by the
writer. You do not appear to be the least bit embarrassed, so we can
only conclude that for some reason you have chosen to blame other
people for the unpleasant experiences you have had in the past few
years. Even though we are quite aware of the fact that you do not
'Exhibit 1876.
"Exhibit 1877.
247
The London Complex
appreciate what was done for you, we must, in all fairness to ourselves,
point out to you that you have at all times been treated with competence
and courtesy, and it is with regret that we have observed the deteriora-
tion of our relationship with you, but you have really left us with no
alternative because of your behaviour.
The writer is quite pressed for time these days, and since our time is
at a premium and must be productive, we cannot afford to discuss your
affairs with you. If you have some specific grievance with the writer,
we suggest that you look after your old accounts and we could probably
arrange to speak with you, provided that your attitude is one of amiable
courtesy, as ours would be in any such meeting. We suggest that you
reflect carefully on facts, forget about making threats, and make your
approach to us in the aforesaid manner.
We will not render an account for this advice.
Yours truly,
REID and ASSOCIATES
Per 'D. W. Reid' "
Reid had already taken somewhat over $22,000 in fees from Wildor
Holdings alone and the alleged arrears amounted to some $300. The
least that must be said about this letter is that it is indeed a remarkable
one for a solicitor to write under any circumstances, but particularly as
a trustee which he now claims to have been.
Marco Holdings' Profit of $9,400 and the Loan to Frederick's
From Aurora's advance of $650,000 to Treasure Island Properties
Reid & McKillop paid the balance owing to British Mortgage & Trust
Company with $50,000 in hand, and Treasure Island Gardens lent the
first advance of $100,000 from Atlantic on the mortgage of its interest
as lessee from Treasure Island Properties of the Faust property to Treasure
Island Properties to pay Julia Faust. Mrs. Faust, needless to say, was un-
aware of the significance of her role which, as far as she was concerned,
amounted to the signing of certain papers put before her by her brother-
in-law. The $6,000 paid to Cousins for the 1.88 acres was supplied by a
payment of $3,000 from a person never identified, and $3,000 plus dis-
bursements from the office account of Reid & McKillop. The beneficiary
of Mrs. Faust's activities was a company called Marco Holdings Limited,
incorporated in Ontario as a private company in January 1962 on the
application of Reid, F. C. Adams and Karen Bale. The company's
minute book, for what it may be worth, indicates that Adams was re-
placed as a director by C. P. Morgan on June 21, 1963. The name of
the company suggests that it might have been originally intended as an
investment vehicle for Morgan, Adams and Reid. Reid testified that
Morgan's beneficial interest was recognized some time before the only
recorded meeting of the directors of the company on June 21, 1963, and
the shareholders' register shows Adams' one share as cancelled, appar-
248
Chapter VII
ently in 1962. The only issue of shares recorded, other than shares to
qualify directors, was that of 2.000 to Morgan and 2.000 to Reid on
December 3, 1963. and the only other meeting of which minutes were
kept is an annual general meeting of shareholders on that date, showing
as present Reid. Elizabeth Foster, a stenographer in his office, and
C. Powell Morgan. A consent for the holding of the meeting incorpor-
ated in the minutes is signed by Reid and Foster but not by Morgan, and
it is reasonably certain that he did not attend it, if indeed it was ever
held.1 Morgan's evidence is to the effect that, at the time when arrange-
ments were being made for the construction of the hockey arena in the
spring of 1963. Reid advised him that he was a partner in Marco Holdings
over the telephone, but that he had never seen any of the shares which he
was supposed to hold and continued: "As a matter of fact one of Mr.
Reid's traits with regard to all of the companies that he has anything to
do with is that people who are beneficially the owners of the shares never
get them. This happened with Wildor, this happened with South Welling-
ton, this has happened with Marco, this has happened in half a dozen of
the companies. So the only reason that I was supposed to be a beneficial
owner of it was over the telephone that he said that I am now a partner."2
In any event Atlantic's first advance of $100,000 made on Morgan's
instructions to Treasure Island Gardens was used to purchase the hockey
arena land from Mrs. Faust, through Reid's trust account for Treasure
Island Properties, being evidently treated as a loan to that company from
Treasure Island Gardens, and Reid had $94,000 in hand which was held
by him in trust for Marco Holdings. With the knowledge and approval of
Morgan, as the evidence makes plain, he advanced $85,000 of this money
as a loan to Frederick's Department Store Limited, but instead of advanc-
ing the whole amount at once, as Morgan understood would be the case,
he waited until the middle of May to advance $50,000 and the middle of
the following July to advance the balance in the amount of $34,650.
having deducted $350 from the second payment as his fee. These
advances were secured by two promissory notes due on November 7,
1963, bearing interest at the rate of 10% per annum payable monthly.
Between July 8, 1963 and August 13, 1964 $7,915.63 was paid on six
occasions, first of all to Reid & McKillop in trust and subsequently in
1964 to Reid & Associates.3 There is no record of this loan being made
or authorized in the minutes of either Marco Holdings or Frederick's
Department Store, Reid being an officer and director of both companies.
but on March 9, 1964 Reid wrote a letter to Harry Wagman, in care of
Aurora Leasing Corporation, in the following terms:4
"We are pleased to enclose Promissorv Note in the amount of Eighty
Five Thousand Dollars ($85,000.00) in favour of N.G.K. Investments
'Exhibit 466.
'Evidence Volume 25.
•Exhibit 1461.
'Exhibit 1462.
249
The London Complex
Limited. This amount was loaned by N.G.K. Investments Limited to
Frederick's Department Store Limited.
The funds were obtained on the sale of certain real estate which was
purchased in trust for N.G.K. Investments Limited located at the
Treasure Island Shopping Centre in the Township of Westminster in the
County of Middlesex and Province of Ontario. The cost price to the
Trustee for N.G.K. Investments Limited was $6,000.00 and the property
was subsequently sold for $100,000.00. After deducting closing costs,
legal fees and disbursements in connection with the transaction, the sum
of $85,000.00 remained and this was loaned to Frederick's Department
Store Limited as evidenced by the Promissory Note enclosed.
The writer sends you his best personal regards and we look forward
to seeing you in the near future."
The accompanying note, dated February 1, 1964, was executed by Fred-
erick's Department Store Limited "per D. W. Reid, Secretary Treasurer",
undertaking to pay on February 1, 1965 the sum of $85,000 and interest
in the meantime monthly at the rate of 10%. No specific reply to this
letter has been discovered, but a memorandum in Reid's hand addressed
to Sidney Chusid, dated June 2, 1964, was found in Wagman's office,
reading as follows:5
"1. Trust agreement N.G.K. : Marco.
2. Note— Frederick's to N.G.K.— $85,000.
3. Interest statement paid by Frederick's to Marco: Marco's account.
4. Statement — White Oaks: — ledger cards.
5. Trust agreement — Reid and Frederick's — Conveyance dated Jan.
31/64.
(Re: White Oaks purchase).
Please check with Harry to see if anything else is required and
determine whether or not he has the promissory note. Thanks.
R."
N.G.K. Investments' "Loan" to Frederick's
Other than the records prepared by Reid in his possession, there is
no contemporary evidence of the loan to Frederick's ever being identified
with N.G.K. Investments. In addition to the documents already referred
to was the trust account ledger for Marco Holdings on which someone
had written in pencil "N.G.K.?", and a bill on the letterhead of Reid &
McKillop addressed to "Marco Holdings Limited Trustee re N.G.K.
London, Ontario" and reading, "To professional services re transfer of
property South London Corporation, our fee herein: $9,500.00" signed
by D. J. McKillop. The account is dated December 30, 1963 and it is
at least true that $9,000 of the $94,000 held in trust for Julia Faust as
trustee for Marco Holdings was transferred to the general account of
Reid & McKillop, merged in the $12,000 odd in fees which Reid at
'Exhibit 1463.
250
Chapter VII
different times charged this company. None of the interest paid by
Frederick's found its way to N.G.K. Investments, but was paid out either
to the general account of Reid & McKillop or to government agencies in
payment of various charges against Marco Holdings. The company had
no books of account and there is nothing in those of N.G.K. Investments
indicating an asset in the form of a loan to Frederick's of $85,000. There
is no doubt that Reid was visibly upset when, on his examination in the
bankruptcy of N.G.K. Investments, the note from Frederick's to the latter
company, which he had prepared, was produced to him. His dilemma was
well illustrated in the searching examination before the Commission by
Mr. Shepherd on this point of which the following is a sample:1
"Q. Let me say this, you say that Mrs. Faust purchased the land for
$6,000. It was sold to Treasure Island Properties for a hundred thou-
sand dollars, and the difference in price went into a trust account in
your office headed 'Marco Holdings Limited', but that at least subse-
quently you were instructed to hold those funds for N.G.K. Investments;
is that correct?
A. Yes.
Q. And Mr. Morgan —
A. I was instructed to have the promissory note executed in favour of
N.G.K.
Q. Mr. Morgan instructed you to keep all the interest which would be
paid under the loan?
A. He authorized it, sir.
Q. And you did keep all the interest paid under the loan pursuant to
Mr. Morgan's instructions; is that correct?
A. Yes. I believe there was additional income as well, Mr. Shepherd,
for Marco.
Q. Yes. We will come to that. I'd just like to deal with this Marco
Holdings transaction. Now, did you report to N.G.K. Investments
Limited at any time the amounts of money received by you and taken
in payment of fees which you had charged to Marco?
A. No.
Q. Did you report to anybody at all in writing respecting this transac-
tion?
A. Certainly the statement of account would be rendered to Marco,
Mr. Shepherd.
Q. You were the President and principal officer of Marco?
A. Yes.
Q. Apart from Marco were there any other —
A. From my records possibly you will find specific accounts were
rendered to Marco Holdings for services.
Evidence Volume 18, pp. 2606-12.
251
The London Complex
Q. And, for a period of time, this $85,000 was, so far as you were
aware, an asset of N.G.K. Investments Limited; is that correct?
A. Yes.
Q. Did you tell Mr. Gregory that N.G.K. Investments Limited held a
note for $85,000 payable by Frederick's?
A. I don't recall any discussion with Mr. Gregory about this.
Q. Did you tell any of the Directors at all of N.G.K. Investments
Limited that they had an asset that arose out of the sale of the land
in the amount of $85,000?
A. Mr. Shepherd, I do not know who the directors of N.G.K. are.
Q. Did you tell anybody at all, other than Mr. Morgan, or later to Mr.
Wagman, that N.G.K. Investments Limited had an asset of $85,000
arising out of the sale of that land?
A. Yes, I discussed it with my auditor, because I was concerned with
the whole transaction.
Q. And when were you told that N.G.K. Investments was not supposed
to have the property — the asset?
A. Some time after the promissory note to N.G.K. was delivered, Mr.
Shepherd.
Q. What reason was assigned?
A. No reason I can recall.
Q. Who told you this?
A. Either Mr. Morgan or Mr. Wagman. I do not know.
Q. Then, for whom were you holding the money?
A. Then for Marco Holdings, I suppose, Mr. Shepherd.
Q. We are back to Marco Holdings?
A. At that time Marco Holdings wrote it off the books. I simply did
not know what to do with it.
Q. Marco Holdings wrote it off their books?
A. Yes, I had a meeting with my auditors when it came to my atten-
tion.
Q. Told you to write it off?
A. Yes. I told them Marco Holdings had an asset I did not consider
an asset at the time of the preparation of the financial statement. Now,
it appears that the company I thought who owned this doesn't. Now,
it is reflected as Marco Holdings. What should be done about it?
Q. How is it reflected as Marco Holdings, Marco Holdings didn't have
any books of account?
A. No, but Marco Holdings had a promissory note originally, and
N.G.K. had a promissory note, and the note to Marco was set aside.
252
Chapter VII
Q. We are quite clear that N.G.K. first came on the scene in the Spring
of 1964. For whom was that money being held in April, 1963?
A. Mr. Shepherd, I could only tell you what has transpired as far as
the records indicate. I have already indicated to you that after I
received instructions to execute a promissory note, or refer to the asset
as being held for another particular company I would consider that to
be done and done proper.
Q. Did you consider it proper — it was your word, Mr. Reid — did you
consider it proper to cause Mrs. Faust to purchase land for $6,000.,
sell it to your client, Treasure Island Properties Limited, for $100,000.,
and pay the difference into a trust account for a company in which you
were a principal? Did you not have misgivings about the propriety of
that action?
A. No, I did not, because I at all times considered this to be part of
the whole. It appeared to me that the desired result was being achieved.
The desired result was in this particular instance that additional monies
were being put into Frederick's. And I wasn't the least bit interested
in benefiting from this personally, from the sale of this land, and I am
still not.
Q. The money in fact originated with Atlantic, being loaned under an
Atlantic loan of $500,000.?
A. I understand that is the case, Mr. Shepherd, I haven't specific recol-
lection.
Q. If it was desired to put money into Frederick's, and nothing more,
why didn't Atlantic loan the money to Frederick's?
A. I do not know.
Q. Did you make enquiries about that? Did you ask Mr. Morgan why
he wanted to do it that way?
A. The financing of the whole arrangement, other than the arranging
of permanent financing, and I attempted very strenuously to arrange
permanent financing, these decisions were Mr. Morgan's decisions.
Q. When you were told that N.G.K. wasn't to have this asset, did you
make any effort to get the note back?
A. I was informed that it was destroyed, Mr. Shepherd.
Q. Who told you that?
A. A telephone conversation.
Q. With whom?
A. I can't specifically say whether it was — I recall making an enquiry
about it, and I am under the impression now it was destroyed. I don't
recall with whom I was talking, but it would be Mr. Wagman or Mr.
Morgan. But at this point I don't know."
253
The London Complex
Reid and Morgan as Partners
Morgan said in his evidence to the Commission that he was aware
of the Julia Faust transaction, had regarded the valuation of arena land
as "a pretty stiff mark-up", although eventually justified by a later loan
of British Mortgage & Trust Company which will be referred to, and,
when asked about the existence of the second note in favour of N.G.K.
Investments signed by Reid, replied: "My own opinion is it was just
manufactured out of fright. I think he just attempted to get himself off
the hook with regard to the collection of their eight or nine thousand
dollars worth of interest that came to Marco Holdings, which never got
to Marco Holdings incidentally, it was just siphoned off in his trust
account. And in addition the difference between the $85,000 and the
$94,000, which was again another $9,000, that also was siphoned off
in his trust account." The examination of Morgan on this point con-
tinues as follows r1
"Q. Was Marco Holdings intended to be a profit for anyone for bor-
rowing that 94 thousand?
A. No, that was supposed to be a profit of Marco, a doubtful one for
the simple reason that $85,000 of it was to go to Frederick's, and that
would have eliminated that profit, and it would have ended up where
the land value was valued at $100,000, Frederick's would have been,
shall we say, 85 thousand better off.
Q. In the unlikely event that Frederick's had been able to re-finance so
that the $85,000 note could be repaid, who was to receive the benefit
of the $85,000?
A. Well that I don't know. If what Mr. Reid said, that I was supposed
to be his partner in the deal would have meant that I would have
received it. But I point out —
Q. You would have received how much?
A. Well, 50 per cent, supposedly on a two-way deal.
Q. Who would have received the other 50 per cent?
A. Mr. Reid."
One of Reid's main interests at this time was the business of sound
reproduction, and he had made connections in New York with a com-
pany called Eastern Sound to which Atlantic Acceptance advanced
money by lending it directly to Reid who, in turn, re-loaned it at a some-
what higher rate of interest to Eastern Sound, Marco Holdings getting
the benefit of this profit. From this connection Morgan developed Man-
hattan Sound Corporation to which large sums of Atlantic money were
lent. Out of the Eastern Sound transaction Marco made a profit of
$5,462.50 by the end of 1962 and, early in the following year, Reid
Evidence Volume 25, pp. 3365-6.
254
Chapter VII
purchased for Marco, on Morgan's suggestion through Barrett, Good-
fellow & Company, 1,000 shares of Commodore Business Machines
(Canada) Limited for $4,250. From the profit made on the Faust pur-
chase $4,950 was paid into Reid's savings account from his trust account
to enable him to purchase a debenture of a concern called Sarlon, which
he declared to the Commission was held in trust for Marco Holdings,
leaving unexplained the use of his personal savings account.2 In short,
when the trust account for Marco Holdings was flattened out in August
1964 the excess of receipts over disbursements had gone, with the excep-
tion of the $85,000 loaned to Frederick's but including the interest
thereon, either to Reid personally or to his firm, and the only disburse-
ment made to C. P. Morgan was $400 on January 3, 1963. For his
supposed one-half interest in Marco Holdings Morgan in fact received
nothing else; indeed the records of the company as to his participation
are in a state of confusion. Although the issue of 2,000 shares to Reid
and 2,000 shares to Morgan purportedly took place at a special general
meeting of shareholders on December 3, 1963 (not the annual meeting
above referred to) the financial statements used for income tax purposes
for the year ending October 31, 1964 show only three common shares
issued at $1 each. The annual return of the company as at March 31,
1964 filed under the provisions of the Corporations Information Act in
June of that year shows only two directors, Reid and Mrs. Foster,
although the minute book records Morgan's appointment as a director
on June 21, 1963. This was corrected by the filing of amended returns
in September 1964, but the company's auditors and the income tax
authorities apparently never knew, and in the case of the former probably
because at that time the relevant minutes did not exist.
By the end of April 1963, with plans afoot to build the hockey arena
as a northerly projection of Treasure Island Shopping Centre, the cost of
all the Treasure Island lands, measured in terms of the purchases from
British Mortgage & Trust Company and Julia Faust by Treasure Island
Properties, was $1,800,000. Advanced to the latter immediately on April
30 was $1,100,000 from British Mortgage & Trust and $650,000 from
Aurora Leasing, secured by first and second mortgages, and $100,000
deriving from the mortgage of its tenuous and undocumented leasehold
interest to Atlantic Acceptance, making a total of $1,850,000 or $50,000
in excess of the fully inflated purchase price of the land. Eventually, as
the Aurora mortgage from Treasure Island Properties for $800,000 and
the Atlantic mortgage from Treasure Island Gardens for $500,000 were
fully advanced, the amount of the total investment reached $2,400,000
of which $1,300,000 derived originally or ultimately from Atlantic. It
was, as has been seen, maintained by Reid and Morgan that the purpose of
this top-heavy investment was to protect the shareholders of Frederick's
Department Store, which alone of all the companies had solicited through
'Exhibit 1464.
255
The London Complex
its principals participation by members of the public, in spite of its status
as a private company, enabling them to acquire ownership of the Treasure
Island Centre in due course. In the meantime steps were taken to estab-
lish the de facto ownership of Treasure Island Properties by C. P.
Morgan, Harry Wagman and D. W. Reid. Mr. Parkes found in the books
of Treasure Island Properties an account headed "Loan Payable" in the
amount of $9,000, identified as being payable to these three individuals
and set up by a journal entry dated May 31, 1964, this date having been
changed apparently from one of April 30. The journal entry can only be
explained by a series of handwritten notes found in the office of Harry
Wagman,3 based on a series of transactions made through the trust
account of Reid & McKillop. One of the Reid & McKillop trust ledgers
was entitled "Treasure Island Properties Limited Share Agreement". No
such agreement was ever found, but on June 28, 1963 the account is
credited with the sum of $3,000 from an unknown source, and another
$3,000 from the Julia Faust trust account previously referred to, as
having been left over from funds supplied to Treasure Island Gardens
by Atlantic, and thence by way of constructive loan to Treasure Island
Properties. The transfer of the $6,000 accumulated by these entries is
then made to a trust account headed "Treasure Island Properties Limited"
on October 8, 1963, accompanied by a notation: "Shares of Morgan and
Wagman". The journal entry records this $6,000 plus an additional
$3,000, not specifically identified but apparently segregated from the
moneys available to Treasure Island Properties from the Aurora loan, to
establish the loan from Morgan, Wagman and Reid in the amount of
$9,000. The additional $3,000 cannot be accounted for by any receipt
of Treasure Island Properties, or disbursement on its behalf, recorded in
the Reid & McKillop trust account, but must be derived from some item
of expense recorded in the Treasure Island Properties journal entry. One
such which requires examination is for "realty taxes" in the amount of
$18,407.50. Disbursements from the solicitor's trust account indicate
that $1 5,000 was transferred in respect of fees of Reid & McKillop and
$3,407.50 recorded as a payment to the Registrar of Deeds, this latter
amount being exactly the $3,400 required to pay the land transfer tax on
a consideration of $1,700,000, plus the $7.50 required to register a deed.
Realty taxes of $18,407.50 paid by Treasure Island Properties would be
an expense deductible from income for tax purposes, but the payment
of legal fees for the acquisition of the capital asset would not. The journal
entry, which purports to reconcile receipts and disbursements of approxi-
mately $174,460, provides under the entry "maintenance (arrears)" an
item of $4,063 attributable to the month of April, 1963. If $3,000 of it
had been paid out by Reid it would explain his share of the recorded
loan. Nothing has been found in the accounts of Treasure Island Proper-
ties, or in any other accounting record, to justify this assumption, although
'Exhibit 1467-8.
256
Chapter VII
Reid, when examined for discovery in the bankruptcy of Aurora Leasing
Corporation, claimed that he, Morgan and Wagman each contributed
$3,000 to the funds of Treasure Island Properties when it bought the
shopping centre from British Mortgage & Trust.4
British Mortgage & Trust's "Atlantic Note"
Before exploring further the plans of Morgan, Wagman and Reid
to save the day for the shareholders of Frederick's it is convenient to
describe the next approach to British Mortgage & Trust Company. A
letter dated July 9, 1964, handwritten and signed by C. Powell Morgan,
is addressed to the trust company in the following terms:1
"We are desirous of laying off with you a receivable maturing October
15, 1964 of $750,000, yielding 8Vi%. We would be prepared to give
you Treasure Island Gardens Limited note endorsed by ourselves for
this amount and we will hold the first mortgage as our collateral,
acknowledging your beneficial interest, until it is paid through a public
offering to be made in early fall. If this can be done we would like it
to be consummated at your early convenience."
This elicited a reply from W. P. Gregory on July 10 as follows:2
"Dear Powell:
We have your letter of July 9th for which we thank you. We will be
pleased to supply you with $750,000 to be in your hands on July 15th.
We regret that the security you suggest is not completely adequate
because of the regulations under which we operate. We suggest the
following :
1. Note from Treasure Island to Atlantic endorsed by Atlantic to us;
2. Assignment of first mortgage from Atlantic to British Mortgage &
Trust Company.
It will be satisfactory if you have your solicitors prepare this assign-
ment of the mortgage and simply send it along to us with the note. We
will not require any further legal technicalities at this time."
Morgan was not deterred by Gregory's stipulations and having thus
secured three-quarters of a million dollars, as it were by the stroke of a
pen from his private office, he proceeded to lay the foundation for the
security of British Mortgage & Trust. The transaction is interesting
because of the light it throws upon the ingenuity of Morgan and the
lightheartedness of Gregory. Treasure Island Gardens was permitted to
offer and Atlantic Acceptance to accept a "leasehold mortgage amend-
ing agreement"3, dated July 16, 1964, to secure an additional $250,000
'Exhibit 3684.
'Exhibit 1471.
■Exhibit 1472.
•Exhibit 1397.
257
The London Complex
over and above the $500,000 already advanced under the mortgage of
its leasehold interest in the hockey arena property, due on October 15,
1964 instead of April 29 at an interest rate reduced from 10% to SV2 % .
Atlantic thereupon executed on the same day an assignment of this
mortgage as amended to secure $750,000 owing and unpaid to British
Mortgage & Trust, and Aurora Leasing, now threatening to bedevil the
situation because of the muddled descriptions of the lands involved which
gave it, as part of its security in its mortgage from Treasure Island Proper-
ties, a portion of the arena lands, executed an agreement postponing its
mortgage in respect of this overlapping parcel to that of the mortgage
assigned. All of these instruments were registered on July 20. Atlantic
Acceptance recorded the receipt of $750,000 from British Mortgage &
Trust, applied $500,000 thereof, plus some $6,000 in respect of accrued
interest, to the reduction of the loan made to Treasure Island Gardens,
and paid the balance of $243,841.23 to Aurora Leasing which in turn
applied that amount to reduce the indebtedness to it of Treasure Island
Properties. Since there had been no additional advance to Treasure Island
Gardens, the effect of this exchange was to reduce the indebtedness of
Treasure Island Gardens to Treasure Island Properties, at this time very
substantial in respect of rental payments and advances made for the
construction of the arena recorded on July 15, one day before the docu-
ments of title were executed and five days before they were registered.
British Mortgage & Trust's security now included the obligation to pay
$40,000 a year to Treasure Island Properties for 99 years, should it find
itself, by foreclosure, in the shoes of Treasure Island Gardens.
On July 21a lengthy letter4 reporting on this transaction and enclos-
ing documents went to British Mortgage & Trust Company, addressed to
the attention of "Mr. W. Gregory" and marked to indicate the dispatch
of copies to C. P. Morgan and Harry Wagman. That it was no ordinary
reporting letter would appear from the fact that it was sent registered
mail and by special delivery. It purported to enclose the original promis-
sory note from Treasure Island Gardens to Atlantic Acceptance and the
assignment and guarantee of the note by the latter in favour of the trust
company. Duplicate copies of registered instruments executed on July
1 6 were also enclosed, and the writer, J. L. Menzies, who signed for Reid,
Menzies & Creighton, the current style of Reid's firm, was at pains to
describe the agreement by Aurora Leasing Corporation postponing its
mortgage from Treasure Island Properties in relation to that portion of
the arena lands which had been mortgaged to it. On the following day
W. P. Gregory replied as follows:5
"Thank you for your letter of July 21st, reporting on this matter in
a most complete fashion. I acknowledge receipt of the documents which
are listed in your letter."
'Exhibit 1473.
"Exhibit 1474.
258
Chapter VII
A duplicate copy of the lease from Treasure Island Properties to Treasure
Island Gardens, on which in part the security of British Mortgage & Trust
depended, was not, however, enclosed, doubtless for the reason that no
executed copy existed, nor were the Commission's investigators able to
find the original promissory note from Treasure Island Gardens to
Atlantic. On October 23 of the same year Walter Pahn, writing to Strat-
ford, this time on behalf of Treasure Island Gardens, asked for informa-
tion for the latter company's auditors as to particulars of "our $750,000
mortgage with British Mortgage & Trust, principal $7 50.000, interest
10% per annum" to which the company replied, "We have your letter
of October 23 and wish to advise that we do not have a mortgage on
Treasure Island Gardens Limited. Perhaps you have confused us with
another company."6 One explanation for this failure to identify the
assignment of mortgage by the assignee itself is provided by the fact that
the trust company, in its annual return as at October 31, 196-1 made to
the Registrar of Loan and Trust Corporations.7 shows a note for $750,000
in a schedule of guaranteed short-term notes, listing it as one from Atlantic
Acceptance Corporation at SVi% with both a book value and market
value of $750,000. A search of the records of Atlantic Acceptance pro-
duced no record of such a debt, although there has been found a letter
dated October 22. 1964 and signed by J. D. Gordon, the assistant
treasurer of British Mortgage & Trust, offering to renew the loan of
$750,000 "against the security of a mortgage of Treasure Island Gardens
matured October 15, 1964"s. In the margin appear the letters "O.K."
W. P. Gregory's Knowledge of the Aurora Loan to
Treasure Island Properties
No account of this singular transaction would be complete without
a sample of the evidence of Wilfrid P. Gregory given on April 26.
1967. Gregory, it will be recalled, was a shareholder of Frederick's and
he and his company were shareholders of N.G.K. Investments, as well
as being shareholders of Aurora Leasing Corporation to a very sub-
stantial extent. He was thus in a position and. indeed, had an obligation
to concern himself closely with the activities of these companies for which
he received financial statements and to which he had directed large sums
either by way of loan or investment of the companv over whose affairs
he presided. The following questions and answers are pertinent:1
"Q. Were you aware that Aurora Leasing Corporation was lending any
monev to any person or corporation in connection with the Treasure
Island Shopping Centre other than Frederick's of course'1
'Exhibits 1475-6.
'Exhibit 1477.
"Exhibit 1478.
'Evidence Volume 116. pp. 15725
25^
The London Complex
A. I had no knowledge until after the collapse that there was any
borrowing from Aurora by Treasure Island. Any of this stuff, or that
Aurora was even lending money on that kind of thing.
Q. So, do I understand your position to be that while you were aware
that Mr. Morgan was taking some interest in this Treasure Island Shop-
ping Centre, you were not aware that the centre was being partly
financed by a loan of $800,000 from Aurora Leasing Corporation? Is
that correct?
A. That is. I was definitely not aware of any of that type of thing.
Q. If you had been aware that Aurora Leasing Corporation was lending
$800,000 in the circumstances which I have described, may I take it
you would have been shocked?
A. I would have been.
Q. What action would you have felt obliged to take?
THE COMMISSIONER: Sorry. I didn't hear the answer to the ques-
tion.
THE WITNESS: I would have been.
THE COMMISSIONER: Yes.
THE WITNESS: This is hypothetical, isn't it?
MR. SHEPHERD: I don't think so, Mr. Gregory, we are going
to have to go into this in some detail and you have told us yesterday
your obligations of this nature in connection with directors. Would you
have felt obliged, for example, to call to the attention of the Atlantic
directors that Mr. Morgan was making a loan of this nature with a
company in which he had an interest?
A. By Aurora?
Q. Yes?
A. Aurora had nothing to do with the Atlantic.
Q. Mr. Gregory, Aurora obtained its money from Atlantic. Aurora
borrowed from Atlantic, did it not?
A. No sir, it didn't.
Q. Did you not tell me yesterday, that you knew that it did?
A. I know now that it did, and I knew that it must have been then, but
this wasn't one of the facts of life staring me in the face every day, that
Aurora was borrowing from Atlantic, because I never followed the
progress of Aurora except when I got an annual statement once a year.
Q. May I take it under those circumstances, you would not have felt
obliged to have informed the directors?
A. I don't think I would have thought of it.
Q. What action would you have taken in respect to Aurora in which
British Mortgage had a significant interest?
260
Chapter VII
A. I think what we would have done if we had known — this hits me
like this — however, this is how you make decisions when you are run-
ning a business. I think we would have said, the deal is off.
Q. Yes?
A. Even though it meant we were going to be — have to find another
buyer."
Mr. Shepherd then refreshed the witness' recollection about the arena on
which he recalled lending money and the examination proceeded.2
"Q. From what source did you first learn that Aurora was lending
money to Treasure Island Properties?
A. I think it was from Mr. Farlinger.
Q. After the collapse of Atlantic in any event?
A. Yes.
Q. Would you look at Exhibit 1471 please?
A. I am just —
Q. I was going on with the Treasure Island Gardens loan. Was there
something you wished to ... ?
A. Well, it is so hard, again, to recall exactly when you learn some
information that I don't believe, as I have said, that I knew that there
was — I can't think why I would know that Aurora had ever loaned any
money to Treasure Island Properties, because I wasn't part of the trans-
action and there was just — I was just trying to check the accuracy of
my remark.
Q. Do you have some doubts about it? Maybe you knew that Aurora
was lending money to a company in which Mr. Morgan had an interest?
A. No, we bought out an Atlantic note.
Q. I was going to come to that. That was Atlantic?
A. This is what I was wondering.
Q. Do I take it your answer respecting knowledge of Aurora's loan is
not qualified in any way?
A. Yes."
Counsel then put to the witness the correspondence which has just been
described relating to the assignment and guarantee by Atlantic to British
Mortgage & Trust, and particularly the reporting letter from Menzies in
which the position of Aurora Leasing had been referred to.3
"Q. Did you receive that letter?
A. I received it.
Q. Did you read it?
A. I don't think so.
'Evidence Volume 116, pp. 15728-9.
'Evidence Volume 116, pp. 15736-42.
261
The London Complex
MR. SHEPHERD: Do you say that upon receipt of that letter you
remained unaware that Aurora Leasing Corporation was lending $800,-
000 to a company in which Mr. Morgan had an interest?
A. When that letter came in, this long reporting letter on this matter,
it was on my desk and I told John Gordon, my assistant treasurer to
take the letter and look after these notes.
Q. And you say you did not read it?
A. I did not read the letter.
Q. Did you look at any of the documents included in the letter?
A. I looked at the note, and I looked at the assignment of the mortgage.
Q. You did not look at any of the documents, or read the letter, to
determine whether or not appropriate steps had been taken to assure
British Mortgage of its priority in connection with a loan of three-
quarters of a million dollars, is that correct?
A. This is why I turned it over to my assistant.
Q. Is Mr. Gordon a lawyer?
A. No, he is not. But, once again, as I have stressed before, we were
lending on the security of Atlantic Acceptance credit.
Q. But, Mr. Gregory —
A. I had refused to lend money to Mr. Morgan on his Treasure Island
Gardens, on a mortgage —
Q. I wish to stress to you, you testified under oath that you did not
know that Aurora Leasing Corporation Limited loaned $800,000 to a
company in which Mr. Morgan had an interest.
Here is a letter which you received that sets the matter out in great
detail. Have you any observations to make on it? To start with, you
did not read it?
A. All right, I don't think I read it, and I say I did not read it, because
1 remember seeing this three-page letter — I have lots to do, much more
important than that, and I turned it over to Mr. Gordon. But, just a
few minutes ago I was trying to recall whether the Aurora was involved
in this thing, I don't remember, but you say that it was just Atlantic.
Q. No, no, no, Mr. Gregory.
A. And I was starting to get clear, was Aurora — or some mention of
Aurora in connection with that Treasure Island Shopping Centre.
Q. Well now, you think that you did know that Aurora was lending
money to Mr. Morgan?
A. I don't recall. If I had a glimmer of it, you know, if it passed my
conscience you know, you know it in passing.
Q. Is it possible that you knew?
A. It is possible.
262
Chapter VII
Q. Is it fair to say that if you did know, you took no action?
A. That is quite right.
Q. Would you look at it?
A. I want to make another point in answer about thinking — in thinking
about your question a minute or two ago. did I think of reporting to
Atlantic Acceptance about a deal that Mr. Morgan — a loan to Atlantic
that Mr. Morgan was making to a company he had an interest in. well,
as I said earlier. I did not know that Mr. Morgan was interested in this
Centre at all. I knew he had a mortgage on it, he asked me to take out
the mortgage and this is what I did. and this is the extent of my involve-
ment in the thing, and my knowledge of it.
Q. What do you mean when you say you did not know he had an inter-
est in the Centre at all?
A. In Treasure Island Gardens that he is asking to take out — over this
mortgage by Atlantic.
Q. You knew he had an interest in Treasure Island Properties, but it
did not occur to you that he might have an interest in Treasure Island
Gardens, is that correct?
A. That is correct. I never kept track of Mr. Morgan and I did not try.
I had enough to do to look after my own business.
Q. Would you look at Exhibit 1474 please, and this is a letter dated
22nd of July, 1964, addressed to Messrs. Reid, Menzies and Creighton.
Barristers and Solicitors, 365 Richmond Street. London, Ontario. Atten-
tion J. L. Menzies, Esq. Re: Treasure Island Gardens Limited. Atlantic
Acceptance Corporation Limited and British Mortgage & Trust Com-
pany.
'Thank you for your letter of July 21st, reporting on this matter in a
most complete fashion. I acknowledge receipt of the documents which
are listed in your letter.
Yours very truly,
"Wilfrid P. Gregory" *
And the — and below that are the letters W.P.G.. G.M. Is that correct?
A. That is correct.
Q. Did you write that letter?
A. I did.
Q. And in the light o\' that letter, can you assist us as to whether you
now recall perusing Mr. Menzies' letter to British Mortgage?
A. Well, Mr. Shepherd. I cannot just see what all this is about.
Q. Mr. Gregory, please answer the question.
A. All right, I will answer the question. I glanced at this letter. 1 saw
that the documents were there, and I turned the thing over. Now. I was
not going to get into all the I was not the solicitor lor British Mortgage
& Trust and I was not the man that looked after the securities 1 was
the president of the company, and 1 don't usualh even see these U
263
The London Complex
Q. But you saw this one, Mr. Gregory?
A. Here is the first page. This is what comes across my desk, and I
saw the documents and I glanced at the thing, but I did not study the
effect of the letter, I did not analyse it as you and your accountants have
been doing for sixteen months."
In fairness to Gregory it must be said that he took the position that the
only thing that really mattered to British Mortgage & Trust was the lend-
ing of money on an Atlantic note for three months and, in view of the
recording of the loan in the report to the Registrar of Loan and Trust
Corporations, he may have convinced himself that this is what had
happened; otherwise that portion of the report must be considered de-
liberately false.
Morgan, Reid and Wagman Undeterred by Mounting Debt and Losses
The only financial statement for Treasure Island Properties Limited
which has been discovered, and indeed appears to exist, was prepared by
Wagman, Fruitman & Lando without audit for the period ending March
31, 1965 and shows a loss for the year of $64,928.41. 1 When added to
the loss for the previous year of $10,009.45 the sum produces a share-
holders' deficit of $74,934.86, with no depreciation on almost $2,000,000
worth of fixed assets having been taken. A statement prepared by the
same firm for Treasure Island Gardens for the year ending August 31,
1964 shows a loss incurred of $43,440.41, without depreciation having
been taken on fixed assets valued at $1,029,400.13. Both companies had
three shares, each issued for $1 and unpaid, as their sole capital invest-
ment, and both of them obtained funds to carry on business from Aurora
Leasing Corporation. By May 31, 1965 Aurora had advanced for and
on behalf of Treasure Island Properties $650,000 to Reid & McKillop,
$12,000 to Treasure Island Gardens and $830,176.97 directly. Upon
these advances interest in the amount of $237,832.84 had accrued and
the only repayment recorded is that of $243,841.24, being that portion
of Atlantic's loan of $750,000 from British Mortgage & Trust Company
transferred to the account of Aurora, as previously noted, in July of 1964
but not recorded as such until January 31, 1965; so that on May 31,
1965 Treasure Island Properties owed Aurora $1,486,168.57. Other
than the mortgage of $800,000 originally given by Treasure Island Prop-
erties to Aurora, the latter company had no security for the additional
amounts loaned of somewhat over $600,000, the advances being simply
evidenced by the giving of promissory notes. Treasure Island Gardens
was financed almost entirely by borrowings from Treasure Island Proper-
ties and the sums advanced by the end of 1964 had reached a total of
$416,527.92, including rental of $40,000 per annum, plus additional
rentals for premises in the shopping centre other than the hockey arena
operated by Treasure Island Gardens, repayments having consisted of
Exhibit 1479.
264
Chapter VII
$21,000 in cash, the $100,000 lent by it to Treasure Island Properties
to complete the purchase from Julia Faust, and the amount notionally
repaid by the amount credited to the Treasure Island Properties loan by
Aurora. One isolated loan made by Aurora to Treasure Island Gardens
was in the amount of $50,000. The funds were used to buy shares in a
company by the name of London Nationals Limited which operated a
junior hockey team in the Treasure Island arena. This loan was also
unsecured, except by promissory note, and was never repaid.2
Two documents throw light upon the question of who was really
intended to own shares of Treasure Island Properties at this stage, and
who were in a position to confer much-heralded benefits upon the share-
holders of Frederick's Department Store Limited. The first is a letter
from Carl M. Solomon to Donald W. Reid asking for the indemnities
promised to him, Irwin Singer and Elizabeth Crisp for acting on behalf
of him and C. P. Morgan "as trustees for a company to be incorporated
under the name of Treasure Island Properties Limited", and reciting the
fact that the writer and Singer executed a mortgage in favour of British
Mortgage & Trust Company and another in favour of Aurora Leasing
Corporation Limited. The letter ends, "would you be good enough to in-
sure that this matter is attended to in light of the prolonged past delay."3
Reid replied promptly for the firm Reid, Menzies, Creighton & Getliffe,
promising to forward indemnities from Morgan, Wagman and himself, to-
gether with draft minutes covering the resignations of the interim officers
and directors.4 On December 3, 1964 Solomon was again writing to Reid,
pointing out that the promised documents had not been received. The
second document is a long letter from Reid, dated September 25, 1964
and marked "Private and Confidential", addressed to Harry Wagman and
referring to a "good meeting" in London, and the fact that Morgan,
Wagman and Reid had been spectators at a hockey game, presumably in
the newly-completed arena. He goes on to give his views on the spheres
of responsibility of R. L. Bonnie, who was general manager of Treasure
Island Properties and Treasure Island Gardens, E. B. Bishop as manager
of Treasure Island Gardens and F. N. Foster as assistant manager of the
latter company. He concludes by saying that he does not think that "we
wish to become involved in a great amount of detail as far as the admin-
istration of the various companies are concerned, however, we should
offer a little guidance at this time to the executive personnel and I am of
the opinion that by so doing, we will enjoy a greater degree of efficiency
in the operation of the Corporations.""' In this letter Reid refers to Bonnie
as "concentrating his efforts on the promotion of Treasure Island Shop-
ping Centre and White Oaks Shopping Centre, and more particularly,
"Exhibits 1480-1.
"Exhibit 1418.1.
'Exhibit 1418.2.
•Exhibit 1418.3.
265
The London Complex
the negotiation and completion of leasing arrangements in connection
with both Centres". This observation about the White Oaks Centre must
provoke an examination of what Morgan, Wagman and Reid then con-
templated, always of course in the interests of the shareholders of
Frederick's, by way of prolonging the involvement of Atlantic Accept-
ance Corporation and its associated companies in the disastrous London
adventure.
White Oaks Shopping Centre and South Wellington Properties
The lands in lots 25 and 26 in the second concession of the Town-
ship of Westminster (now in the city of London), which have already
been mentioned as the site of a competing discount store operation in the
experienced hands of Sayvette Limited, had been conveyed by their
owner David Rubinoff to a company of which he was a principal, known
as South London Corporation Limited on May 15, 1962. In this con-
veyance he reserved four acres along an entrance road, but all the lands
were pooled as security for a mortgage loan of $2,600,000 provided by
Capital Funds (I.A.C. Ontario) Limited in the same month. The lease
to Sayvette by South London Corporation, executed in April, was assigned
by the latter, together with all other leases in what was known as the
White Oaks Shopping Centre, to Capital Funds in October of the same
year. In January of 1963 South London Corporation mortgaged some
two of the 27 acres involved to Coronation Investment Company Limited
to secure the sum of $375,000, and here the operations of the company
rested until, in the following October, Donald Walter Reid as trustee
appeared as the purchaser of all the lands owned by South London Cor-
poration and Rubinoff which were transferred by two deeds, dated
October 22 and registered on October 25, consideration for the convey-
ances being the sum of $1,953,197 made up by assumption of mortgages
in the amount of $1,650,000 already advanced, securities to the value of
$1,500 and a note for $301, 697. x Thereupon Donald W. Reid as trustee
executed a mortgage of all the lands to Aurora Leasing Corporation,
dated October 24 but not registered until January 15, 1964, to secure the
sum of $500,000 with interest at 10%, due November 30, 1964. By the
terms of this mortgage, which are most unusual, the mortgagor is excused
from performing the covenants and making the payments provided for,
there being apparently no liability attaching to him at all except the
obligation to disclose the trusteeship should default occur. Whatever
may be the validity of these precautions taken by Reid, they vividly illus-
trate the concern which was felt on all sides for the security of Aurora's
investment which ranked behind those of Capital Funds and Coronation,
to the extent of $ 1 ,550,000 and $ 1 00,000 respectively in amounts already
advanced, the rent from Sayvette having already been assigned to the
Exhibits 1407-8.
266
Chapter VII
former. Since the company which was to own the land, and for which Reid
was acting as trustee, had not covenanted to pay Aurora anything it is not
surprising that Aurora, which advanced $341,000 on its mortgage, was
never paid any interest on the loan. David Rubinoff, however, who was
guarantor of South London Corporation's mortgage to Capital Funds,
sought to protect himself by concluding an agreement with South Welling-
ton Properties Limited at the outset, dated October 22, 1963, by which
that company, here revealed as the beneficiary of Reid's activities, agreed
to pay the Capital Funds mortgage after it had acquired title to the lands
on which White Oaks Shopping Centre stood. This agreement also recited
that Atlantic Acceptance Corporation had written a letter which is
attached to it, and this letter, addressed to South Wellington Properties
Limited, reads as follows:2
"This will advise that Atlantic Acceptance Corporation Limited is
prepared to advance to you $1,550,000.00 with which to discharge the
mortgage to I.A.C. (Ontario) Limited on September 15, 1965, in return
for a similar mortgage at a rate of 10% per annum for a period not to
exceed 12 months. The personal guarantee of Mr. D. Rubinoff will not
be necessary if the mortgage presently outstanding is assigned to us.
A similar commitment for $100,000.00 to take care of Coronation
Investment Limited is available at 1 1 % per annum.
The stand by fee is lA % per annum.
Yours very truly,
'C. P. Morgan'
President"
Of course when that day came Atlantic Acceptance was in no position to
advance anything. South Wellington Properties was incorporated as a
private company in Ontario on October 4, 1963. Its records consisted
of the usual minute book and entries in Reid's trust account. The three
original shareholders holding one share each were D. W. Reid, D. J.
McKillop and Elizabeth Foster as of October 4, 1963. No evidence of
these shares having been paid for appears in the trust account. On May
15, 1964 McKillop's share was transferred to Reid; on November 30,
1965 both Reid's shares were transferred to R. L. Bonnie and Mrs.
Foster's share to E. B. Bishop; as of that date the company was left with
only two shareholders from which to elect its board of three directors.
The original agreement of purchase and sale between Donald Walter
Reid as trustee and South London Corporation, dated October 24, 1963
provided for not less than 15% or 150,000 of the shares of South
Wellington Properties to be issued to the vendor as part of the purchase
price. These shares were to be accorded a value of 1 c\ which accounts for
the $1,500 in securities referred to in the affidavit of land transfer tax
attached to the deed from South London Corporation to Reid in trust.
Exhibit 1424.1.
267
The London Complex
This covenant of Reid was never honoured but it was referred to in the
plans for South Wellington Properties which, grandiose as they were,
must be examined even though they never materialized. A convenient
starting point is a memorandum among the documents found by the
Department of National Revenue in Harry Wagman's briefcase. It is
headed "South Wellington Properties Limited" and is reproduced below
incorporating amendments made by hand to the original typescript:3
"Authorized Capital
1,500,000 Common shares, no par value
600,000 Preferred shares, non-cumulative, redeemable, par value
$2.00 each
Treasure Island Properties Limited (a company incorporated under
the laws of the Province of Ontario) owns and operates Treasure Island
Gardens including the curling rink, convention centre, etc. We under-
stand that there are issued and outstanding 3 common shares of the
stock of this company. It is proposed that the shareholders owning these
3 shares exchange them for 750,000 common shares of South Wellington
Properties Limited, and we suggest that this transaction be the first
transaction South Wellington Properties Limited enters into. We further
suggest that the corporate shell of Treasure Island Properties Limited
be maintained and that it be a wholly-owned subsidiary of South
Wellington Properties Limited.
We also understand that a trustee on behalf of Frederick's Depart-
ment Stores Limited has purchased a shopping centre owned by South
London Corporation Limited for the sum of $1,941,000 by the assump-
tion of existing mortgages in the amount of $1,650,000 and the assump-
tion of accounts payable of approximately $291,000. We suggest that
this property be conveyed to Frederick's Department Stores Limited,
and after the conveyance takes place, the common shares of Frederick's
Department Stores Limited, of which we understand there are 460.000
issued and outstanding for a cash consideration of $720,000, be ex-
changed for 460,000 preferred shares, par value $2.00 each, of South
Wellington Properties Limited, and as an additional consideration of
this exchange options and warrants of 230,000 common shares of
South Wellington Properties Limited at varying prices be given to the
common shareholders of Frederick's Department Stores Limited. We
further understand that Frederick's Department Stores Limited have an
operating deficit at the present time of some $500,000 and have entered
into a long term leasing agreement for the space occupied by Frederick's
Department Stores Limited in the Treasure Island Properties. We
further understand that it is the intention of Frederick's Department
Stores Limited to cease its operation. We suggest that Frederick's De-
partment Stores Limited sell off its Adam's stores and that Frederick's
Department Stores Limited cancel its lease in the shopping centra which
heretofore has been owned by Treasure Island Properties, and that
•Exhibit 1487.
268
Chapter VII
Frederick's Department Stores Limited attempt to wind up its affairs as
follows :
It will sell the shopping centre it acquired from South London
Corporation Limited (sic) to South Wellington Properties Limited
at an appraised value which we understand will result in a
$500,000 or $600,000 profit.
It will sell its furniture, fixtures and equipment and inventory to
the proposed new tenant of the Frederick's store.
After this has been completed the company can be wound up and
all of its remaining assets will pass into the hands of South Wel-
lington Properties Limited since it is a wholly-owned subsidiary.
We feel that doing the transactions as outiined above will attract no
taxation other than the profits realized on the sale of the shopping centre
from Frederick's Department Stores Limited to South Wellington Prop-
erties Limited after the present loss carry forward of some $500,000
has been applied.
After these transactions have been completed, the shopping centre
owned by Treasure Island Properties Limited can be appraised and an
appraisal surplus created on the books of Treasure Island Properties
Limited. A consolidated balance sheet of South Wellington Properties
Limited will now reflect these two shopping centres at their present fair
market value which will enable you to arrange your necessary mortgage
financing.
November 6, 1963"
In addition to this, other handwritten working papers were found in
Wagman's office, one set headed, "In order to flatten out the Treasure
Island companies,"4 and another "Projected Operating Costs — White
Oaks Shopping Centre", attached to which are draft journal entries and a
pro forma balance sheet of South Wellington Properties,5 with other un-
titled pages.6 There is also a bundle of handwritten notes in Reid's pre-
cise handwriting taken from the office of Reid & Associates headed
"South Wellington Properties Limited."7 Although these documents indi-
cate some changes of detail in what appears to be Harry Wagman's
original plan of November 6, 1963, they do not alter its substance which
would have provided for South Wellington Properties being a parent
company, owning or controlling, either directly or through subsidiaries,
the White Oaks Shopping Centre, the Treasure Island Shopping Centre
and Treasure Island Gardens. South Wellington Properties would own
the White Oaks centre directly, all the shares of Treasure Island Proper-
ties, which owned the Treasure Island Centre, and all the shares of
Treasure Island Gardens Limited which would, in turn, own the Treasure
Island Gardens, or hockey arena building. South Wellington Properties
'Exhibit 1488.
'Exhibit 1489.
•Exhibits 1490-2.
'Exhibit 1423.1.
269
The London Complex
would also own all the shares of Frederick's Department Store Limited
which was destined to become a corporate shell without assets. The
operating deficits already accumulated would be eliminated by the simple
expedient of writing up the physical assets provided by the shopping
centres; mortgage financing was expected from American sources, pro-
vided by the Auer Mortgage Company in Detroit, in the amount of
$5,500,000. It was further proposed that 980,000 common shares would
be issued, of which 230,000 shares would be available for the share-
holders of Frederick's, and 750,000 would be issued to the beneficial
shareholders of Treasure Island Properties Limited. Wagman makes no
reference to South London Corporation's 15% interest and, if this was
to be represented by the issue of additional shares, the total amount out-
standing would have been 1,130,000.
Proposal to the Shareholders of Frederick's Department Store
This scheme was presented to the shareholders of Frederick's Depart-
ment Store in a letter dated January 31, 1964 from Reid & McKillop
and signed by D. W. Reid, a sample of which is one addressed to William
A. Pike in Stratford.1
"We have been instructed by the Chairman of the Board of Directors
of Frederick's Department Store Limited to bring the following facts to
your attention and to outline a proposal to you which will, in the opinion
of the Board of Directors, enhance your investment in Frederick's Depart-
ment Store Limited.
The land and buildings known as Treasure Island Shopping Centre
were purchased by a Corporation known as Treasure Island Properties
Limited. The same Corporation has acquired the ownership of White
Oaks Shopping Centre located on Wellington Road South, London,
Ontario. A new Corporation has been formed known as South Welling-
ton Properties Limited and this new Corporation is at the present time
acquiring ownership of the two above mentioned shopping centres,
the combined values of which will exceed $7,000,000.00, when both
Centres are completed. It is the intention of South Wellington Prop-
erties Limited to proceed with the completion of both Shopping Centres
as soon as possible.
It is proposed to exchange either one redeemable 5 % non-cumulative
preference share in South Wellington Properties Limited or one com-
mon no par value share having a stated value of $2.00 in South Wel-
lington Properties Limited for each share of Frederick's Department
Store Limited issued and outstanding. In addition, it is proposed to
give the existing Shareholders of Frederick's Department Store Limited
an option to purchase one common share of South Wellington Prop-
erties Limited at a price of $1.00 per share for each four common
shares held in Frederick's Department Store Limited, which option
shall be open for acceptance for a period of ninety days from the date
of this letter.
Exhibit 1484.
270
Chapter VII
We have been requested to inform you that the above proposal is
conditional upon acceptance by all of the existing Shareholders of
Frederick's Department Store Limited, and the Directors of Frederick's
strongly recommend the acceptance of the proposal. If you find the
proposal to be acceptable to you, please sign the enclosed acceptance
form and return it to this office at your earliest convenience. You will
be notified in due course whether or not all of the Shareholders of
Frederick's Department Store Limited have accepted the proposal.
We will look forward to hearing from you by return mail, if possible.
Yours truly,
REID and McKILLOP,
Per: 'D. W. Reid'"
Enclosed in this letter was a form of acceptance of this proposal
and an agreement to forward shares held of Frederick's Department Store
Limited, upon notification that the proposal had been accepted by all of
the Frederick's shareholders, to Reid & McKillop in escrow. Pike's reply
was in the following terms:2
"I was indeed pleased to receive your letter of January 31st and to
note that you have, along with all others involved, been successful in
bringing about such an attractive proposal.
I am pleased to enclose the Acceptance properly executed and would
like to indicate at this time my willingness to take advantage of offers
being extended to existing shareholders to acquire further stock. If any-
thing else is necessary please advise."
The information contained in Reid's letter that Treasure Island
Properties Limited had acquired ownership of the White Oaks Centre
was not in accordance with that given to Wagman, whose memorandum
refers to a trustee having done so on behalf of Frederick's Department
Store Limited, and no doubt Reid would have been in difficulty had he
now informed the shareholders of that company to this effect, since the
control of South Wellington Properties Limited was reserved in the grand
design largely for the beneficial shareholders of Treasure Island Proper-
ties, who were none other than himself, Wagman and Morgan. In the
end, long after it had ceased to matter, Reid registered on September 15,
1965 a deed purporting to have been executed on July 15 of that year
in which he conveyed the White Oaks lands as trustee to South Welling-
ton Properties Limited, the deed reciting that he had all along been
trustee for that company3 as the agreement with Rubinoff implied.
Something further must be said about the impending shareholdings
in South Wellington Properties, since the various working papers which
have been discovered indicate that there were changes of plan from time
to time. C. P. Morgan maintained in his evidence that the beneficial
•Exhibit 1486.
'Exhibit 1411.
271
The London Complex
owners of Treasure Island Properties Limited were to be the shareholders
of Frederick's from the time that the former company purchased the
Treasure Island property from British Mortgage & Trust Company.
Frederick's had issued 463,000 shares of which 100,000, of 107,501
issued in the first instance to F. C. Adams, had been returned to Reid &
McKillop, and were held by that firm in trust and, according to Reid, at
the direction of Morgan; N.G.K. Investments held 169,514, Morgan had
10,001, Wagman 10^000, Walton 13,000, Reid 30,001 and Mrs. Adams
5,000, which account for a total of 345,017 shares. Even without an
eventual disposition of shares in South Wellington Properties set aside
for the beneficial owners of those of Treasure Island Properties, the
Morgan group would have had no difficulty in controlling the affairs of
the new company. As to Reid's shares in Frederick's, 25,000 of which
he claimed to have held in trust for either Wildor Holdings or the Kings,
it is of interest to note that in the course of his examination for discovery
in the bankruptcy of Frederick's taken on November 18, 1965, and con-
siderably earlier in time than the evidence he gave to the Commission,
he twice asserted that he held 30,001 shares in that company, and his
v/ords in at least one place should be quoted verbatim, since the state-
ment was made upon oath and should be carefully compared by the law
officers with what has already been quoted.4
"3. Q. Do you have any connection, or have you had any connection
with the bankrupt company?
A. I have had, yes, I was a shareholder, I was a director, I held
the office of Secretary-Treasurer.
4. Q. How many shares did you hold in the company?
A. Thirty thousand, thirty thousand and one, in that neighbour-
hood, I'm not positive.
5. Q. When did you acquire these shares?
A. I acquired certain shares at or about the time of the incorpora-
tion of the company, and the initial shares that I acquired I
paid $1.00 per share for these. Subsequently I acquired an
additional 5,000 shares at $2.00 a share, and I don't just recall
when that was."
One of Wagman's working papers dated March 31, 19655 contains
a note of the following figures, headed "shares equity":
Shares
Frederick's shareholders 464,000 @ $2.00 928.000.00
D. Rubinoff, 15% of 900,000 shares 135,000 @ 2.00 270,000.00
T. I. Properties 301,000 @ 2.00 602,000.00
900,000 1.800,000.00
♦Exhibit 3683.
5Exhibit 1492.
272
Chapter VII
Above these figures appears the following addendum:
W.P.G 25,000
D. King 10,000
R. Bonnie 10,000
E. B. Bishop 10,000
From a letter written by David King to C. P. Morgan in April, 1965, in
which he demanded 10,000 shares of Treasure Island Properties Limited,
it would appear that this note refers to a projected issue of shares to
employees of this company and the "W.P.G." can be none other than
Wilfrid P. Gregory. Morgan, after referring to a discussion which he had
with Reid and Gregory in the spring of 1963, was under the impression
that Gregory was to get 25,000 shares from this company and the tran-
script of his evidence on this point is as follows:6
"Q. Was Mr. Gregory to have his 25,000 shares?
A. He was to have his 25,000 shares because he had assisted in the
putting together of the negotiations.
Q. Was he to get these shares personally?
A. Yes, yes.
Q. Mr. Gregory said on an examination in the bankruptcy of either
Aurora or N.G.K. that you offered him an interest in Treasure Island
Properties Limited but that he declined it. Do you recall any such con-
versation?
A. It is possible. I wouldn't deny what Wilf said, he is a truthful
person."
None of what was planned for South Wellington Properties came
to pass because the long-term financing, so ardently sought, was never
available. Nor indeed did there appear to be any prospect of further
short-term financing, for Atlantic Acceptance and its associated com-
panies by the middle of 1964 had turned their eyes in other directions.
The Auer mortgage company in Detroit was still mentioned as a source
of funds, and as late as June 16, 1965 Reid is to be found writing to
David Auer enclosing a list of shareholders in South Wellington Proper-
ties Limited, which has not been discovered but which must surely have
contained more names than Reid, Bonnie and Bishop, and announcing
that "it is quite likely that the following persons will comprise the Board
of Directors, Wilfrid P. Gregory, C. Powell Morgan, David Rubinoff. H.
Wagman, R. S. Bonnie."7 Reid also conducted a correspondence with
George H. Weinrott, the president of Cimcony Limited and Cimcony of
'Evidence Volume 25, p. 3378.
'Exhibit 1501.
273
The London Complex
Canada Limited, who was talking in terms of a bond issue of $9,000,000
and whose requests for information, assignments of leases and so forth
went largely unanswered.8
The End of Frederick's
Thus by the time of the collapse of Atlantic Acceptance the problem
of extricating Aurora Leasing Corporation and Adelaide Acceptance
from the morass into which reckless and, indeed, unconscionable lending
had led them was still unsolved. Aurora's loan to Frederick's Depart-
ment Store stood at $476,162, to Treasure Island Properties at $1,519,-
763, to Treasure Island Gardens at $51,491 and to Donald Reid as
trustee in relation to the mortgage of the lands of White Oaks Shopping
Centre, due at the end of the previous November, $384,614, all for a total
of $2,432,030. Adelaide's single investment in the unregistered deben-
ture of Frederick's amounted by June 17, 1965, with accrued interest,
to $634,050. All the investment of the shareholders of Frederick's in the
amount of $720,000 had been swallowed up and a substantial deficit
incurred at the expense of that company's trade creditors. At a later stage
of this report it will be proper to attempt to assess the not as yet fully
ascertained loss of British Mortgage & Trust Company, now shouldered
by its successor Victoria and Grey Trust Company, both as a primary
lender and as an investor in N.G.K. Investments, in which latter role it
shared with Aurora Leasing to a large extent the loss suffered from the
former's investment in Frederick's. It would be tempting at this point
to draw a line under this melancholy account, but further attention must
be given to the operations of Donald Reid so far as they impinged upon
the fortunes of Atlantic Acceptance and British Mortgage & Trust.
The annual returns made under the Corporations Information Act
as at March 31, 1963 show only two directors for Frederick's Department
Store Limited, D. W. Reid and C. P. Morgan, even though F. C. Adams'
resignation is recorded as having occurred on January 10 of that year.
Although the Department of the Provincial Secretary drew to the atten-
tion of Messrs. Reid & McKillop, to whose address all correspondence
was sent, the provisions of section 396 of the Corporations Act. to the
effect that the board of directors of a corporation shall consist of a fixed
number of directors not fewer than three, the deficiency continued and
was so recorded in the returns for March 31, 1964. But thereafter no
more returns were filed or filing fees paid and, after advising these two
directors in writing, the name of the company was duly listed in the
Ontario Gazette as in default for not having filed or paid fees in respect
of the year 1962. Why Reid had neglected to perform this simple func-
tion at the end of the company's first year of life can only be guessed at,
but in any event by the end of 1964 Frederick's had ceased to do busi-
ness and it became necessary to find another tenant for the Treasure
"Exhibits 1422.1 to 1422.6.
274
Chapter VII
Island Shopping Centre. This turned out to be Sentry Department Stores
Limited, a company represented by a firm of solicitors in Toronto known
as Samuel Ciglen & Associates, and its tenancy was created by a lease
dated March, 1965 from South Wellington Properties Limited, executed
on behalf of the lessor by D. W. Reid without any reference to the office
which he held in that company, for a period of 25 years at a rental of
$96,000 per annum.
Reid Acts for British Mortgage & Trust:
Loans to Samuel Ciglen's Clients
This document presents two points of interest, the first being that
South Wellington Properties was not the owner of the premises which it
purported to lease, and the second that among the fixtures and equipment
leased together with the premises were chattels already under lease to
Frederick's Department Store by Aurora Leasing Corporation. It is
perhaps not necessary to pursue this extraordinary transaction further
or to inquire as to the result of the dispute which arose between the
trustee in bankruptcy for Aurora Leasing, the principals of Treasure
Island Properties Limited and the officers of Victoria and Grey Trust
Company, but it serves both as an example of Reid's ethics and compe-
tence as a conveyancer and to introduce a transaction in which Sentry
Department Stores Limited and Reno Financial Corporation Limited
were involved with British Mortgage & Trust and Donald Reid. This be-
gins with a letter from W. A. Pike,1 addressed to Messrs. Reid, Menzies,
Creighton & Getliffe and dated April 28, 1965, asking this firm to act
for the trust company in taking a mortgage from Sentry Department
Stores Limited on property in Ottawa and from Reno Financial Corpor-
ation Limited on property in Toronto. The former mortgage was to
secure $900,000 and the latter $925,000. The making of these loans was
described by Pike as a matter of urgency and Reid's firm was directed to
co-operate with J. R. Anderson, Q.C. of the Stratford firm of Ander-
son, Neilson, Bell, Dilks & Misener, the trust company's general
solicitors. Pike's instructions were lengthy and contained the following
unusual paragraph:
"As you know we are also to receive as a bonus for taking these two
mortgages a stock certificate for 25,000 shares of Frederick's Depart-
ment Stores. On the telephone yesterday you mentioned that the correct
name of the company might be White Oaks Shopping Centre. We do
however have an understanding of the indication of the foregoing and
will rely on you to see that 25,000 shares of the right company are
transferred to us prior to advancing of any principal."
More will be said hereafter about this, but on May 4, Reid received, and
deposited in his trust account, two payments of $924,075 and $899,100
representing the full amounts of the two mortgages with the mortgagee's
Exhibit 1419.4.
275
The London Complex
inspection fee deducted. Another $300,000 was deposited in the trust
account on May 27, received from Adelaide Acceptance and representing
funds to be advanced on second mortgages on these two properties. Reid
& Associates received directions from Sentry Department Stores and
from Reno Financial Corporation, the first being dated April 30, 1965,
authorizing the firm to withhold the sum of $125,000 from the proceeds
of the British Mortgage & Trust loan to apply to legal fees and commis-
sions payable, and the second, dated May 27, to disburse an aggregate of
$2,000,000 in payment of various accounts payable of these two com-
panies, the balance to go to their solicitors, Samuel Ciglen & Associates,
in trust. This included an amount of $8,000 to be paid to South Welling-
ton Properties, and it was in fact paid by Reid & Associates on June 14
to Adelaide Acceptance to the credit of Frederick's Department Store.2
According to Reid's own account the vendors to Sentry and Reno
of the premises in Ottawa and Toronto known as G.E.M. Stores were
not prepared to close on the appointed day, and, as the records of the
trust account indicate, he took the $1,800,000 advanced by British
Mortgage & Trust and bought a short-term demand note of Atlantic
Acceptance, bearing interest at 4V4 % and payable to Reid & Asso-
ciates. This was called for payment on May 21 on which day the money
returned to the firm's trust account plus $3,353.42 in interest. The
transcript of Reid's evidence on the point is as follows:3
" — The Reporter read the following question:
'Q. Do you recall purchasing a note for $1,800,000 issued by Atlantic
Acceptance Corporation Limited payable with an interest rate of four
and one-quarter per cent upon demand in the month of May, 1965?'
MR. SHEPHERD: What is your answer to that?
A. I did not purchase the note, Mr. Shepherd.
Q. What was done respecting $1,800,000?
A. I had $1,800,000 from British Mortgage & Trust in order to put me
personally in funds to close the transaction relating to properties in
Ottawa and Toronto.
Q. Were these two mortgages, one from Sentry Department Stores
Limited and one from Reno Financial Services?
A. Yes.
Q. Go on, please?
A. I attended in Toronto in an effort to close these transactions, and
in addition to the moneys paid to me by British Mortgage & Trust,
moneys were to be payable to me by Adelaide Acceptance.
-'Exhibits 1419.1 and 1419.2.
'Evidence Volume 21, pp. 3012-5.
276
Chapter VII
Q. Yes?
A. I attended to close and, because of a lack of preparation on the
part of the purchasers and vendors, they just were not ready to close
the transaction. I attended at Mr. Morgan's office and informed him
that the transaction would not be closed that day as anticipated.
Q. Yes?
A. There was an agreement on the part of Sentry and Reno to pay
interest on the moneys however in order to keep them available day to
day, because it was a very large sum of money.
Q. Am I to understand Sentry and Reno were to pay interest to British
Mortgage & Trust?
A. That is correct.
Q. As if the money had been advanced on the closing date?
A. That was the agreement, in order to enable me to hold the funds.
When I attended at Mr. Morgan's office he said to me — I informed him
of this fact that I was not able to close, and he said, 'Well, you had bet-
ter write out a cheque to Atlantic Acceptance for that money, and as
soon as you are ready to close I will set it up in your account, available
to you to close'. I indicated to him that I would require a direction from
British Mortgage & Trust to do so. He indicated to me that that was
not necessary at all. I suggested that I telephone Mr. Gregory, and Mr.
Morgan indicated to me that that was not necessary at all. I said, 'Well,
I have to have something in writing,' because I was not questioning Mr.
Morgan's authority to give me these instructions but I did want some-
thing in black and white in connection with this cheque. Mr. Morgan
instructed Mr. McFadden to prepare a letter to me under the corporate
seal of Atlantic Acceptance Corporation Limited acknowledging receipt
of these funds and agreeing to pay them over to me on demand. Mr.
Morgan came back to the room and he said, 'For your difficulty in the
transfer, in bookkeeping and inconvenience, I will even pay interest on
this money, which may reimburse you for some of the other disburse-
ments which you have incurred acting on my instructions.'
Q. And what did you do?
A. I gave Mr. Morgan a cheque."
Reid's Disbursements and Final Letter to Pike
Morgan described as ridiculous the suggestion, made here in evidence
to which he listened in the course of the hearing, that he had told Reid
that it was unnecessary to obtain instructions from British Mortgage &
Trust. In any event Reid did not do so and merely appropriated the
interest paid as part of his fees. This transaction seems to be indefensible,
since he was bound to account to either British Mortgage & Trust for the
interest obtained, or to Sentry or Reno if either of them were paying
interest to British Mortgage & Trust to keep the money available. That
277
The London Complex
it was also hazardous, one month before Atlantic's default, was not of
course apparent at the time, but an investment of trust funds by a
solicitor for his own profit cannot be condoned. Reid did not report to
Ciglen until June 28 and did so on that date in a long letter which con-
cluded with an expression of gratitude for Ciglen's "gracious hospitality
extended to us during the many weeks involved in closing this trans-
action"; he said he would take the liberty of calling on Ciglen when
he was next in Toronto. Attached to the letter are two statements of
receipts and disbursements. The first dealt with receipt and disbursement
of $2,000,000 in which the disbursement of $8,000 to South Wellington
Properties was duly recorded although, as has been seen, it did not take
place in that form, and the second dealt with the $125,000 which had
been withheld, pursuant to the directions of Sentry and Reno, for commis-
sion and fees. From this amount Reid records the sum of $100,000 as
having been disbursed for "commission and fees as directed" and then
lists a number of disbursements which conclude with the payment to
Samuel Ciglen & Associates of $5,564.13, being the balance on hand. Of
the $100,000, the disbursement of which was so criptically reported,
Reid actually paid on May 31 $7,000 to Chartered Management Con-
sultants and $60,000 to Valley Farm and Enterprises Limited, trans-
ferring $33,000 from trust to his firm's office account. When asked by
counsel to explain these payments he said that services were performed
by Morgan and Wagman in arranging the Sentry and Reno loans from
British Mortgage & Trust.
Before leaving this transaction it will be instructive to note how
British Mortgage & Trust Company, so badly served throughout this
lamentable period of its history, fared with the one stipulation to its own
advantage which had been made in connection with the Sentry and Reno
loans. On November 3, 1965, W. A. Pike, then an employee of Victoria
and Grey Trust Company, wrote to Reid & Associates inquiring about
the 25.000 shares of Frederick's Department Store Limited which were
to have been received by British Mortgage & Trust. He received the
following, and perhaps not unexpected reply from Reid in a letter dated
November 10:1
"We have noted your comments with respect to the issuing of 25,000
shares of Frederick's Department Store Limited. You will undoubtedly
recall that the matter of the handling of the issuing of these shares was
discussed both with you and Mr. Gregory prior to the advancing of
funds under this loan. The intention was, of course, that British Mort-
gage & Trust Company would eventually acquire shares in the corpora-
tion which would own both Treasure Island Shopping Centre and White
Oaks Shopping Centre. Since refinancing arrangements were not com-
pleted for the Treasure Island and White Oaks Centres on the closing
of the Sentry and Reno transactions, we were instructed to advance
Exhibit 1503.
278
Chapter VII
funds under the Sentry and Reno loans on the understanding that the
shares in the Shopping Centres would be issued at some subsequent
date. Mr. Dilks attended the closing of the Sentry and Reno deals on
your behalf and he will undoubtedly have notes in his file confirming
instructions given both to him and to this firm.
You are aware of the fact that the issuing of these shares was some-
thing that was discussed between Mr. Gregory and Mr. Morgan at a
time when their relationship was quite different than it is at the present
time. We regret that we can offer no advice as to whom you should look
in order to collect any funds in this connection."
London Lighthouse Investments Limited
One of the reasons advanced by Reid for accepting Morgan's alleged
suggestion about the investment of the $1,800,000 in his trust account
without a direction from British Mortgage & Trust Company was his
experience with London Lighthouse Investments Limited. This was in-
corporated as a private company in Ontario on January 21, 1965, on the
application of three stenographers in Reid's office, and the occurrence of
the word "Lighthouse" indicates its connection with Atlantic Acceptance
which employed that symbol as its distinguishing mark. The incorpora-
tors applied for the name granted to them, or alternatively for the name
Oakville Lighthouse Investments Limited, the purpose of the company
being to own the lands on which Atlantic's head office in Oakville was
built and to which a large extension was planned. It was suggested by
Reid that the name "London" indicated financial participation by resi-
dents of that city, but it must be concluded from the evidence now to be
examined that final ownership of the shares was intended to rest in
familiar hands. Walter Pahn, for instance, became a director according
to the minute book on February 18, 1965, and a declaration given to
the Royal Bank of Canada dated June 9, 1965, signed under seal by
Betty Foster, reports the directors to be Walter E. Pahn, herself and
Frank Cockburn, another employee of Chartered Management Consult-
ants. The same declaration states that Walter E. Pahn was president,
Elizabeth Ann Foster secretary, and Harry Wagman controller. It is
perhaps unnecessary to say that the share certificate records remain un-
disturbed by these purported changes among the directors, the usual
three shares being issued at $1 each with no record of any payment
having been made.
The Deal with Great West Saddlery for Purchase
of Atlantic's Head Office Property
The head offices of Atlantic Acceptance were housed in a building
on the North Service Road, adjoining the Queen Elizabeth Way within
the limits of the town of Oakville. Atlantic leased the property from
279
The London Complex
Malar Holdings Limited in 1961, the latter conveying it in November
1964 to Oakville Properties Limited. A feature of Atlantic's lease was
the covenant of the lessor to agree to the sale of the property for a stated
sum should it not be prepared to erect an addition to the existing build-
ing for Atlantic's use. At about the same time officers of the Great West
Saddlery Company Limited which controlled a subsidiary company by
the name of Richardson Construction, owing Atlantic somewhat in excess
of $200,000 which it was unable to pay, approached C. P. Morgan with
a proposition that their company or its nominee would acquire the Oak-
ville property together with adjoining lands, finance and construct the
required addition, lease the property in its turn to Atlantic, and sub-
sequently sell the whole concern at a profit which would be applied to
Richardson's debt. As the full implications of this suggestion, which was
elaborated in negotiations during the autumn, became clear to Morgan,
he found the prospect of controlling the ultimate owner of the lands
attractive to himself, and Donald Reid was called into consultation.
London Lighthouse Investments Limited was the result and the plan
finally adopted was for the company to acquire the land and existing
buildings from Great West Saddlery at a profit to the latter which would
either accrue directly to Atlantic or be held in some form of pledge
against the discharge of the Richardson company's indebtedness. Accord-
ingly, on January 21, 1965 an agreement of sale was signed between
London Lighthouse and Philip F. Boylen, in trust for Great West Saddlery
providing for the purchase by the former of the property in question at
a price of $725,000, and for the production by Boylen of a contract for
the construction of an addition to the existing building for a price of
$350,000. Pending the closing of this transaction, $150,000 of Atlantic
Acceptance notes were to be deposited in escrow with the Crown Trust
Company.
On January 22, 1965, London Lighthouse authorized by telegram,
signed by Reid & Associates, the deposit of the notes. On the same day,
Atlantic Acceptance drew a cheque on the Toronto-Dominion Bank in
favour of Adelaide Acceptance in the amount of $150,000, charging this
sum to inter-company loans. This amount was credited on the books
of Adelaide to "notes payable Atlantic Acceptance Corporation" and
Adelaide thereupon drew a cheque on the Toronto-Dominion Bank in
favour of Atlantic to purchase Atlantic short-term note No. 2853 for
$150,000. This was recorded as an advance to London Lighthouse.
On consolidation of the accounts the inter-company loan would dis-
appear, leaving a debit from London Lighthouse with a credit to short-
term notes payable of $150,000. Thus this stipulation in the agreement
was fulfilled without Atlantic or anybody else putting up any money.1
On February 1 8 British Mortgage & Trust Company made an advance to
Atlantic of $480,000 which Atlantic credited to its short-term notes
'Exhibits 3343-6.
280
Chapter VII
account, and for which there is no authorization appearing in the minutes
of the trust company's board of directors or executive committee. The
next day Atlantic drew a cheque in favour of Reid & Associates in the
amount of $328,975, and the inscription on the remittance advice de-
scribed this payment as "disbursements against cheque for $480,000
deposited today from London Lighthouse Investments Limited". This
was again charged to short-term notes and Atlantic at once issued a
cheque to Adelaide for $151,025 to pay for the short-term note in
favour of Crown Trust Company, called for payment on February 19,
and being credited by Adelaide to notes receivable from London Light-
house of $150,000 and interest of $1,025. Adelaide thereupon, and also
on the same day, drew a cheque to the order of Reid & Associates in trust
in the amount of $127,000. The difference between the amount of
$480,000 received from British Mortgage & Trust and the $455,975
advanced to Reid & Associates, being $24,025, remained in Adelaide's
bank account.2
A statement of adjustments prepared by Messrs. Ruwald & Pool-
man on behalf of Philip F. Boylen as vendor shows the ostensible nature
of this transaction as a sale to London Lighthouse Investments Limited
of part of Lot 11, Concession 2 S.D.S., Township of Trafalgar for
$725,000, payable as of February 18, 1965 by what is described as a
third mortgage to be given back by the purchaser to the vendor to secure
the amount of $125,000 and, as a result of minor adjustments of rent
and taxes, a balance to close of $598,858.03. The statement3 indicates
that part of this balance has been paid in the form of a promissory note
for $1 50,000, payable to and held by the Crown Trust Company, and the
copy in evidence is endorsed with a receipt for "Atlantic notes payable
to Pilkey and other for $150,000". As seen above, this note was actually
called for payment, and the requirement was fulfilled by the delivery of
Atlantic Acceptance medium-term senior notes representing a debt to
Burlington Investments Limited, a private company owned by the Pilkey
family who were principals of Oakville Investments Limited, of $100,000
and to Mrs. Nedra Pilkey of $50,000. Mr. A. W. Moreton, C.A. of
Touche, Ross, Bailey & Smart, who analysed this transaction and gave
evidence about it to the Commission on October 6, 1966,4 testified that
the notes were handed to Reid, by Reid to Poolman, by Poolman to
Boylen, and by Boylen to the Pilkeys, although the only reference to the
notes referred to in Poolman's reporting letter of July 12 to Great West
Saddlery Company is as follows: "the deposit in the form of a $150,000
promissory note, deposited by the purchaser with the Crown Trust Com-
pany was released to the Purchaser on closing," and the solicitor goes on
to say that all the financial arrangements for closing were made by Mr.
Exhibits 3343-52.
"Exhibit 3353.
'Evidence Volume 70.
281
The London Complex
A. T. Holland of the Great West Saddlery Company and he has no
record of them. What actually happened is perhaps unimportant, but
the records of the Montreal Trust Company show Burlington Invest-
ments Limited as holding $100,000 of these notes at the time of Atlantic's
default and Mrs. Pilkey $40,000, she having been repaid $10,000 in
May. Poolman's reasonable assumption that the mortgage referred to in
his statement would be a third mortgage was not, however, justified by
the event. It was registered on title on February 1 9 at the same time as
the deed from Boylen to London Lighthouse, and the assignment by
Boylen to Atlantic Acceptance Corporation Limited was also registered,
securing to Atlantic the position of first mortgagee. This assignment5 is
absolute in form except for the interpolation in handwriting of the follow-
ing, immediately above the signature of Boylen witnessed by Ruwald:
"This agreement is made to collaterally secure an indebtedness of the
Great West Saddlery Company Limited to Atlantic Acceptance Cor-
poration Limited and the assignee agrees to reassign the mortgage at the
expense of the assignor upon the discharge of the said indebtedness. All
payments made under the assigned mortgage are to be made to the
assignee to be credited to the account of the Great West Saddlery
Company Limited." The instrument was not executed by Atlantic
Acceptance and, consequently, this covenant would appear to be inopera-
tive. The expected mortgage to British Mortgage & Trust Company
dated February 22 was not registered until July 5, thus ranking behind
Atlantic's mortgage. Ruwald & Poolman recorded in their trust account,
under the heading "Holland A.T. et al re Pilkey", receipt of a cheque on
February 19 from Reid & Associates in the amount of $448,858.03. and
a disbursement on the same day of this amount to the Great West Sad-
dlery Company.
Some mention should be made of Boylen's position and that of
Great West Saddlery, since considerable and prolonged efforts were
made to perfect his title as vendor in a manner which has aroused the
interest of the trustee in the bankruptcy of London Lighthouse Invest-
ments Limited. The troubled history of the Great West Saddlery Com-
pany had resulted in the accumulation of losses which for income tax
purposes could be applied against the income of future years, and this
"tax loss" situation — to use the unintelligible vernacular — apparently
justified the acquisition by the company of the shares of Oakville
Properties Limited, Burlington Properties Limited and Malar Holdings
Limited, together with two parcels known as the "Chedoke Property"
and "Firestone Properties", in which the principals of these companies
had an interest, for a total of $726,900. By disposing of the current
assets of the companies whose shares had been purchased, repaving
shareholders' loans and arranging new mortgages, Great West Saddlery
acquired cash of $187,750 which, added to the proceeds of the sale to
'Exhibit 3357.
282
Chapter VII
London Lighthouse, amounted in the aggregate to $911,608, including
the $125,000 secured by the mortgage from London Lighthouse to
Boylen, the assignment of which to Atlantic reduced its receipts to
$786,608. Its disbursements, including over $50,000 in penalties and
legal fees, amounted to $785,416.27 and the profit on the transaction
was substantially the amount of $125,000 credited to the debt of
Richardson Construction.6
Position of British Mortgage & Trust Company
In returning to the position of British Mortgage & Trust Company
a letter from Reid, Menzies, Creighton & Getliffe to W. P. Gregory,
dated March 1, 1965 and commencing "Dear Wilf", is the first to be
noticed.1 It encloses a direction to British Mortgage & Trust, signed
for London Lighthouse Investments by B. A. Allen and B. Foster of
Reid's office staff, directing it "to pay the sum of Four Hundred &
Eighty Thousand ($480,000.00) Dollars presently being borrowed by
this company from you to Reid & Associates in trust", as well as a
promissory note executed by the same persons, undertaking to repay to
British Mortgage & Trust this amount in three months time together
with interest at IVi % per annum, and dated February 18. At the foot
of the note is an endorsement guaranteeing payment by Atlantic Accept-
ance and executed for the guarantor by C. P. Morgan as president. The
second is a letter to Reid & Associates from British Mortgage & Trust,
signed by Pike and dated June 23, 1965, announcing that the trust com-
pany has approved a loan on the Oakville property of London Light-
house and will be "obliged if you will act on our behalf in registering a
mortgage just as quickly as possible". The letter continues: "The mort-
gage may bear any convenient date and will come to us from London
Lighthouse Investments Limited; principal $480,000; interest IV2 % per
annum; computed from February 22, 1965 and payable half yearly . . .
the mortgage shall mature February 22, 1966." The dismay and anxiety
at British Mortgage & Trust, spanned by these two communications, can
be imagined.
Reid's evidence on the subject of London Lighthouse Investments
Limited was to the effect that the idea of forming a company to pur-
chase Atlantic's head office lands and premises from the existing owners
originated with Morgan, and that he himself had discussed the desira-
bility of investing in it with people in London and had in fact arranged
a mortgage loan in the amount of $850,000 which was not proceeded
with. Nevertheless, on Morgan's instructions, he made arrangements to
incorporate London Lighthouse and take title to the property in its
name. After the default the minute book and other records were sent to
"Exhibit 3359.
Exhibit 3360.
283
The London Complex
Morgan by mail. Reid recollected that the purpose of the transaction
was to cause the existing owners to sell to a third party at a price in
excess of the fair market value so that some benefit would accrue to
Atlantic Acceptance, but he conceded that the incorporators would
have conveyed the shares to Morgan himself or any nominee, and this
in fact had been done. As to the participation of British Mortgage &
Trust Company he had this to say:2
"Q. Was British Mortgage & Trust to get a mortgage on these lands?
A. No. When I received my instructions — I believe the flow of money
went from British Mortgage & Trust Company to Atlantic and was
entered to my trust account, if I recall correctly. I may be in error, but
I think that is the case. But when I received instructions on this matter
I telephoned Mr. Gregory and reported to him that I had not received
any instructions as to how his mortgage was to be drawn, and what
terms and conditions were to be included in the mortgage. I was in-
structed that no mortgage was required in the circumstances.
Q. Mr. Reid, the lands were there available to be mortgaged, the secur-
ity was available if British Mortgage wanted to take it. Was there any
discussion as to why they did not bother to take the security that was
there?
A. Mr. Shepherd, I will tell you the words that were used, because they
will stick in my mind forever. Mr. Gregory said 'don't clutter up the
title with a mortgage'.
Q. And you did not?
A. That is correct.
Q. Then ultimately in July, 1965, British Mortgage did take a mortgage,
did they not?
A. Yes. Subsequently I had a discussion with Mr. Gregory on this point
and he indicated a great deal of concern about the loan and solicited
my co-operation in attempting to obtain a mortgage. I subsequently
received instructions and they did proceed to get a mortgage."
Mr. Shepherd put to Reid an item from his handwritten notes,3 the
authorship of which he acknowledged, which read as follows : "Re Light-
house. Need instructions from Wilf — Can sell deal now — before built
for $1,350,000 or $1,300,000— Suggest selling and keeping land to
north for future expansion". Thereupon the witness said that this re-
ferred to one of the first discussions undertaken in connection with Lon-
don Lighthouse in which the vendor (presumably Boylen) had suggested
that, if a suitable mortgage were arranged, the whole proposition could
have been sold to investors before the actual construction of the build-
ing. Gregory's evidence is illuminating, since it illustrates the relationship
2Evidence Volume 21, pp. 3025-6.
•Exhibit 1425.1.
284
Chapter VII
between Gregory and Morgan at the time and the exceptionally uncriti-
cal attitude of the former.4
"Q. Was there any doubt at all in your mind when Mr. Morgan made
these approaches to you that Mr. Morgan must have an interest in
London Lighthouse?
A. There wasn't any thought in my mind that he did, other than as
president of Atlantic Acceptance.
Q. Why would you not expect to hear from the principal of London
Lighthouse with respect to a loan made to that company?
A. Mr. Morgan did so much negotiating for everybody. The fact that
he knew me and the fact that he always refused to go through my offi-
cers which I often asked him to do — I just figured well, he said, 'Well,
I know Gregory. I will see about it.'
Q. Did you not think it odd that he wouldn't volunteer the information
as to who these persons were who were borrowing $480,000?
A. He volunteered nothing. You knew better to ask him when you
started doing business with him very long.
Q. I wonder why you didn't ask him — why didn't you say, 'London
Lighthouse. Who were they, whatever you call them?'
A. Maybe I should have, but what difference did it make. I didn't care
what security they had or who they were, as long as we had Atlantic
Acceptance guarantee. This is what I wanted. He wanted the loan if
he would give me their guarantee and if he could do it and I said, 'If
you can get me Atlantic's guarantee, the loan is okay'.
Q. Why did you not want to take the mortgage?
A. Well, this was probably foolish of me, but I had refused the mort-
gage and this gets back to where Reid phoned me up and said, 'What
are your instructions with regard to the mortgage on the London Light-
house deal' and I was a little annoyed, because I think, because of the
fact I had turned this mortgage idea down at least twice and maybe a
third time and I said, 'It is not good mortgage security and I won't
have that kind of mortgage on my books', and then I did — not thinking
at all at that time, that some kind of mortgage is better than no mort-
gage. I said, 'Just give me the note. It is all I want'. That is what I got.
About two months later I was happy to have a mortgage and then I
asked for it and got something.
Q. Did you know who the officers of London Lighthouse were?
A. No. Whoever signed the note, I presume. The officers — as long as
they signed over their seals and guarantee was proper.
Q. Did you know Mr. Pahn, Walter Pahn?
A. Well, when you say, 'Did I know him', I think I met him once in
the — and would recognize him. He was in Walton Wagman's office, I
think. It wasn't in '65.
'Evidence Volume 115, pp. 15685-90.
285
The London Complex
Q. Can you assist us at all. as to whether you recall him being an officer
of London Lighthouse?
A. I can't assist you. I think maybe he was, but I was surprised be-
cause he is just a clerk.
Q. You say, 'you were surprised'. Do I understand you to mean that
you were surprised in the sense that you assumed he was acting for
someone else?
A. Yes. I am surprised he would have been named an officer of Lon-
don Lighthouse.
Q. Well then, perhaps I have misunderstood you. Are you saying that
if he was, you didn't know?
A. I didn't know at the time, and when I found out, I was surprised.
Q. Well, let me see now, Mr. Morgan asks for a mortgage on these
premises which you declined. Is that correct?
A. Tli at is correct. That is right. Twice.
Q. And why did you decline it again, please?
A. Because there wasn't sufficient value in the mortgage over and above
the first mortgage that was on there. We could only go two-thirds of
total value including the first mortgage and blanketting the first mort-
gage.
Q. Then, he asked you a third time and you agreed to lend the money
against a note from London Lighthouse guaranteed by Atlantic. Is that
correct'1
A. Yes. In other words, it was Atlantic's notes.
Q. When there was first discussions about you having the additional
security of a mortgage on the premises, you took the view that you
didn't want it. You wanted the guarantee of Atlantic and that is what
you had. Is that correct?
A. Yes. I don't know whether Reid intended to offer that as an alter-
native or not. but when he said 'What are the terms of the mortgage?',
I simply said, 'I wasn't interested in the mortgage,' but, I said. 'I would
lend >t on Atlantic's guaranteeing the note and just to get me that, and
they could have their money'.
Q. Well now. after the collapse of the Atlantic by early July, British
Mortgage & Trust I believe, did in fact obtain a mortgage on these
premises which it registered.
Mow did that come to pass'.1 It was then being contended that this
was all a mistake earlier. 1 understand?
A. Not by me it wasn't.
Q. What happened?
A. I phoned Reid, 1 think, a week or so after the — well, the second
week when we knew things were real!) going bad and he had been look-
ing over what how we were being affected by Atlantic and I guess I
286
Chapter VII
ate humble pie a bit and said, that we had not insisted on a mortgage
before, but under the circumstances we would be delighted to have a
mortgage. Would you now get it for me?"
Here again is convincing proof that Morgan and his associates
were quite untroubled by the prospect of Morgan being in a position
to benefit from a contractual relationship with the company of which
he was president instigated by himself, and that among these associates
must be included W. P. Gregory, Q.C., president of a venerable trust
company and a bencher of the Law Society of Upper Canada, who
showed an astonishing degree of recklessness about his company's security,
only brought home to him by the financial collapse of the borrower
through which he had so offhandedly lent in this instance almost half
a million dollars on its simple guarantee of the note of a company with-
out assets before the closing with Boylen. The real value of the property
upon which Atlantic's head offices stood was, of course, much less than
anything that would have justified the price paid by Boylen, except as
it might be contrived to appear in the stratagem devised by Morgan and
himself. A valuation of the lands and buildings in question was made
in November 1965 by E. P. Brownridge & Co.5 in the amount of
$315,000, but at this time the addition was incomplete, the construc-
tion company with which Boylen had contracted having rim out of money
and having commenced a mechanics' lien action for upward of $1 10,000.
Atlantic's loss as a result of this transaction, could not, on the face of it,
appear to be considerable since it acquired a first mortgage on the prop-
erty to secure $125,000 and had advanced $127,000, retaining some-
what more than $24,000 in the account of Adelaide Acceptance after
creating obligations in the form of notes to the amount of $150,000
upon which interest still accrues in respect of $140,000. As a device for
securing repayment from the Great West Saddlery Company, however,
the operation appears to have been fruitless, and the security otherwise
provided for the Richardson Construction debt has created difficulty for
the trustee. British Mortgage & Trust, with a third mortgage and a note
from London Lighthouse Investments endorsed by Atlantic Acceptance,
was the real loser, and its successor Victoria and Grey Trust Company
eventually accepted $55,000 to close the account.
Delinquency of Donald W. Reid
For his consistent and almost single-minded mismanagement of
the affairs of his clients over the four-year period Donald W. Reid
charged, in respect of the major transactions alone, $130,000 in fees.1
He was disbarred and struck off the rolls by the Law Society on August
27, 1968, and I am bound to say that it would, in my opinion, be adverse
'Exhibit 3363.
'Exhibit 1504.
287
The London Complex
to the public interest were he ever allowed to resume the practice of law.
The overwhelming majority of lawyers in Ontario are content and, in-
deed, anxious to found their livelihood and their reputation in the com-
munities in which they live upon the hard work and sound advice which
they offer to the public. There are unfortunately practitioners who, from
the beginning of their careers, use their privileged status and the confi-
dence which it inspires wholly in their own interest, and among these
Reid must certainly be numbered. If one adds to the records of his self-
seeking and incompetence a strong suspicion of fabricating evidence and
of perjury committed in the course of his testimony to the Commission,
his case is serious indeed. Of the other principal actors it can only be
said that their activities must be judged in the light of many other trans-
actions to be examined in this report, but that what they did was entirely
consistent with all that had gone before, and with what they were doing
contemporaneously in other related matters at the expense of the share-
holders of Atlantic Acceptance and British Mortgage & Trust.
288
CHAPTER VIII
Commodore Business Machines
and Associated Companies
Transformation of Commodore Portable Typewriter Company
The fortunes of Commodore Portable Typewriter Company Limited,
last examined incidentally to the creation of Commodore Sales Accept-
ance Limited by Atlantic Acceptance and the indefensible transactions
by which Atlantic finally achieved complete ownership of its own
subsidiary, must now be recounted in detail, since they present a new
aspect of the many-faceted mass of Atlantic operations. As a result of
resolutions taken at a meeting of the board of directors on December
15, 1961 supplementary letters patent were issued by the Provincial
Secretary of Ontario on February 7, 1962, changing the name of the
company from Commodore Portable Typewriter Company Limited to
Commodore Business Machines (Canada) Limited and converting it
from a private to a public company; cancelling 11,000 unissued prefer-
ence shares of the 36,000 originally authorized and 2,968 unissued
common shares of the original 4,000 and changing the 1,032 common
shares of a par value of $1 each into an equal number of common
shares without par value; subdividing these last into 516,000 issued
common shares constituting a split of 500 new shares for one of the
old; creating an additional 1,484,000 common shares without par
value and abolishing the preference share classification entirely; thus
leaving it with a capitalization of 2,000,000 common shares with no
par value of which 516,000 had been issued and paid for, and poised
upon the brink not only of further expansion in manufacturing and
sales, but of a stock market operation sufficiently unusual, if unfor-
tunately not unique, to require the taking of measures to make sure
that it is not repeated in any similar form in the future. The first public
offering of the company's shares was made in June 1962 and consisted
289
Commodore Business Machines
of 300,000 common shares issued out of the treasury, the subject of a
prospectus, dated May 31, 1962,1 offering the shares at $2.50 each,
subject to the approval of the Ontario and Quebec Securities Com-
missions, and the final acceptance of a listing application to the
Canadian Stock Exchange of Montreal. In the event all 816,000
shares were called for trading on July 23, subject to escrow requirements.
The progress of this company from its incorporation in October
1958, and particularly from its beginnings in the Bronx garage from
which Jack Tramie! and Manfred Kapp despatched their first repaired
and reconditioned typewriters, had been astonishingly rapid. As has
been seen in Chapter V, it had grown up under the wing of Atlantic
which, through Commodore Sales Acceptance, supplied it with all its
funds and owed everything to C. P. Morgan without whose interest and
intervention it could not conceivably have survived, at least in the hands
of its progenitors.
By December 31, 1961 the company, and its American subsidiary
Commodore Business Machines Inc., owed Commodore Sales Accept-
ance $954,553, and the latter's American subsidiary, Commodore
Factors Limited $588,831, or a total of $1,543,384 without allowing
for the conversion of loans from Commodore Factors into Canadian
funds. By the end of 1962 the debt due to Commodore Sales Accept-
ance had declined to $333,563 as a result of the application to it of
the whole of the proceeds of the public issue of 300,000 shares; loans
of Commodore Factors had risen to $1,055,388 U.S. funds, and Aurora
Leasing Corporation had become a creditor to the extent of $264,591;
yet by June 17, 1965 the debt to Commodore Sales Acceptance was
no more than $302,265, and Commodore Business Machines had
actually become a creditor of Commodore Factors for $442,902. How
this was accomplished by an enterprise which could not ever have been
considered profitable in the conventional sense of that term, and how
Commodore Business Machines survived the collapse of Atlantic, albeit
in a form and through means which should ensure for it in the future
a public scrutiny of the most searching kind, occupied the attention
of the Commission during many weeks of evidence, concerned not only
with the fortunes of Commodore Business Machines and its subsidiary
and associated companies, but also with the enrichment of Jack Tramiel,
Manfred Kapp and, of course, C. P. Morgan.
Structure of the Commodore Group of Companies
The Commission's expert witness on the financial and accounting
aspects of the inquiry into the affairs of Commodore Business Machines
was Mr. Bertrand Wolfman, C.A., of the management consultants firm
lExhibit 345.
290
Chapter VIII
of P. S. Ross & Partners, associated with Touche, Ross, Bailey & Smart.
Mr. Wolfman began his evidence on May 18, 1966 and was examined
by Mr. Shepherd throughout that and the four succeeding days, the
transcripts appearing in Volumes 34 to 38 of the evidence, successively
and inclusively. The matters dealt with were in part exceedingly
complex, and the preparation required to elucidate them by both counsel
and witness laborious and prolonged. Associated with and, indeed,
inseparable from the affairs of Atlantic and Commodore Business
Machines in this branch of the inquiry were those of Analogue Controls
Incorporated, control of which was exercised by Commodore Business
Machines during a period of two years from August 1962 to September
1964, and which then and thereafter until the spring of 1965 was a
borrower of funds which originated with Atlantic Acceptance. For its
detailed and expert evidence on the affairs of this company the Com-
mission relied upon Mr. Gerald R. Gillman, C.A., of the Ontario
Securities Commission, whose testimony was given on June 14 and 16,
1966 and appears in Volumes 44 and 45. The evidence of many other
witnesses given at the public hearings of the Commission, in the course
of examinations under the Securities Act by Mr. Cartwright and others,
by Mr. Peter J. Adolph of the United States Securities and Exchange
Commission, and by various counsel in the course of examinations for
discovery in the bankruptcies of many associated companies, the affairs
of which were part and parcel of the complicated transactions which must
now be dealt with, has been utilized to the fullest extent consistent with
the need to keep this narrative within manageable and intelligible
proportions.
The corporate structure of Commodore Business Machines, at the
time when Mr. Wolfman's evidence was given, is illustrated on a
diagram overleaf showing the relationship of the company to its
subsidiary corporations, the information about their dates of incor-
poration or acquisition and the extent to which they were owned and
controlled by the parent.1 Those companies of which it had disposed,
either by selling their assets or their shares before the conclusion of the
public hearings of the Commission, are distinguished in the diagram by the
use of dotted lines. The earlier and, until 1962, the only subsidiary
was Commodore Business Machines Inc., incorporated in the State of
New York on July 5, 1960, and it in turn created a wholly-owned
subsidiary called Commodore Drycopy Inc. on June 14, 1962. The
acquisition of Associated Tool & Manufacturing Company Limited, its
subsidiary Shelburne Tool Company Limited and Belpree Company
Limited, all on March 16, 1964, from Racan Photo-Copy Corporation
Limited was achieved for a price of $300,000. The purchase of Humber
"Exhibit 2 133 A.
291
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Chapter VIII
Typewriters & Business Equipment Limited, in a roundabout manner
involving a marked escalation in price, will be considered in some detail,
as will that of Pearlsound Distributors Limited, and two companies
acquired and subsequently disposed of, Analogue Controls and Willy
Feiler Zaehl und Rechenwerke GmbH. The last named was an estab-
lished manufacturer of typewriters and adding machines having its
principal works in West Berlin, and was still operated by its founder,
Willy Feiler, after its acquisition by Commodore Business Machines
in the spring of 1963 for the sum of $1,000,000. Tramiel's story2 was,
as already mentioned, that Kapp, on returning from a visit to their
Czechoslovakian supplier of typewriters either at the end of 1960 or
the beginning of 1961, had stopped in Paris to visit an exhibition of
goods in which Commodore Business Machines was interested. There
he met a man called Markus, the principal of a company in England
called Typewriter Sundries Limited. Markus showed him the "Quick"
adding machine which he said was newly available for the North
American market. On learning of this, Tramiel went to England to
negotiate with Markus for the North American distributing rights of
the machine which, because of its efficiency and low cost of manufacture,
seemed to be just what Commodore required to establish its reputation
in the business machines field. The Quick machine was manufactured
by the Willy Feiler company, and Markus had formerly been Willy
Feiler's son-in-law. So successful was the new machine that Tramiel
visited the plant in Berlin, and pressed for an increase in production
which he told Feiler he could readily dispose of. Feiler said he was too
old to invest any more of his own money in the business and more
would be needed for the increase contemplated. Thus it came about
that a close personal relationship, and unusually favourable circum-
stances, caused Willy Feiler to sell to Commodore Business Machines
an operation which commanded the admiration of all who saw it. and
knew the quality of its work, for a price which C. P. Margan in
particular, as chairman of the board of the purchaser, recognized as
being a bargain indeed. Had it not been for the willingness of Litton
Industries Inc. to buy the Willy Feiler subsidiary after the Atlantic
default, when Commodore Business Machines was faced with insolvency.
for more than three times what the latter had paid for it in L963,
providing funds with which some $2,900,000 worth of debt to British
Mortgage & Trust Company could be settled in 1966 for approximately
$1,600,000, redemption of pledged securities could not have been
undertaken, and control of their enterprise might have passed out of the
hands of Jack Tramiel and Manfred Kapp and their associates into
those of the receiver and manager of Atlantic Acceptance.
'Evidence Volume 84.
293
Commodore Business Machines
Financial Statements and the Source of Funds
The audited financial statements of Commodore Business Machines
for the fiscal years ended June 30 begin with that for 1961, the terminal
date having been changed from January 31 in that year. Reference
to the comparative statement of consolidated earnings annexed to the
1962 prospectus, already referred to, shows that the company had a
profit of $4,310 as at January 31, 1960, a loss of $11,169 during the
following year and, for the five months ended June 30, 1961, a loss of
$25,988, and, if depreciation had been taken on tools, dies and moulds
at the rate authorized in 1962, losses would have been substantially
increased, and the apparent profit for 1960 would also have been
converted into loss. A different story was told, however, for the
eight months ending February 28, 1962 in which the statements were
for the first time shown as a consolidation of those of Commodore
Business Machines (Canada) Limited and Commodore Business
Machines Inc. They record net income after taxes of $55,674.1 Table
362 shows condensed comparative balance sheets, and a comparison
between the situation existing at June 30, 1961 and June 30, 1965, only
two weeks after the Atlantic default, shows a rise in total assets from
$1,353,000, approximately, to $8,387,000, a common share investment
of $400 and preferred share investment of $25,000 (issued to Helen
Tramiel and Estelle Kapp for paying the company's original debt to
Commodore Sales Acceptance) compared with $1,263,892 and $1,000,-
000 respectively, capital surplus of $148,594, compared with $96,305
and retained earnings in a deficit position of $32,848, compared with a
deficit position of $442,993 in 1965. To produce this impairment of
the shareholders' equity there had been an outflow from retained
earnings of almost $900,000 during the year ending June 30, 1965.
In addition, there were outstanding convertible debentures and sub-
ordinated notes in the amount of $2,878,500, and the assets included
$1,545,155, described truthfully enough as intangible, the excess of
cost of investment in subsidiaries over their book value at the dates of
acquisition amounting to $464,800 and goodwill of the large and
doubtful order of $581,000.
When the story has been told it will be seen that even this
equivocal record of financial achievement is largely the product of
illusion, and of illusion produced by a ruthless lack of scruple in raising
money from the public and in setting the stage from which fresh appeals
might be made. A number of schedules were prepared by Mr. Wolfman
to illustrate the sources from which Commodore Business Machines
received funds, on the one hand by the issuing of shares, debentures
and subordinated notes, and on the other by direct loans made against
inventory, by factoring accounts receivable and on other security. The
Exhibits 353-4.
fExhibit2135.
294
Chapter VIII
source of funds obtained through the issue of shares, debentures and
notes, the distribution of these securities and the amounts realized
therefrom by Commodore Business Machines are illustrated by Table
37,3 entitled "Financing of Debt and Equity Issues". The table shows,
on the left, the date of issue, the nature of the securities and the names
of those purchasers who might now, under current legislation, be described
as "insiders" with reference to the succeeding columns which illustrate
the sources of their funds, with special emphasis upon loans or invest-
ments made by Aurora Leasing Corporation and British Mortgage &
Trust Company. It may be noted, in passing, that the first two items,
which record private issues of 200,000 and 316,000 shares, refer to
occasions before the 500-for-l split of the original common shares
was authorized by the supplementary letters patent of February 7,
1962, and the issues were in fact of 400 and 632 old shares respectively
to persons and under circumstances which will be illustrated in a
subsequent table and described in the text. Indeed the table as a whole
cannot be comprehended until the story unfolds, and it is sufficient at
this stage to note that of the net proceeds of $5,021,000 received by
the company from these issues, exclusive of the assumption of share
options, the conversion of debentures and the exercise of share warrants
which brought the total up to $5,216,000, the sources of funds
contributed by subscribers were Aurora Leasing to the extent of
$1,192,178.60, British Mortgage & Trust Company of $2,525,000 and
others, described as miscellaneous or unknown, of only $945,213.50.
The balance of $500,000 was contributed by the purchase of $2,000,000
in subordinated notes and preference shares on December 28, 1954
by Commodore Business Machines itself, by means of a loan made in
that amount to Trans Commercial Acceptance Limited, a company
owned at the time by Associated Canadian Holdings Limited the shares
of which were held equally by Tramiel, Kapp and Morgan and their
families, with the exception of a minor interest given by Morgan to
Harry Wagman, a part of which, according to his own account, was held
in trust for William L. Walton.
Loans from Commodore Sales Acceptance
Bank accommodations played a minor part in the financing of
Commodore Business Machines in its early years under Morgan's
tutelage, being only $50,000 by the year ending June 30, 1963, although
at the same period of 1965 they had risen to $663,011. Foremost
among the day-to-day lenders of money to the company were Commo-
dore Sales Acceptance and Commodore Factors, both of course deriving
their funds from Atlantic Acceptance. The history of operating loans
made by Commodore Sales Acceptance to Commodore Busin
'Exhibit 2136.
295
Commodore Business Machines
Machines and its associated companies, excluding interest accrued and
receivable from October 1961 to June 17, 1965, is illustrated by Table
38.1 The selection of October 1961 as the starting point for recording
loans which, under some categories, originated before that month was
explained by Mr. Wolfman as a result of the inadequacy of the account-
ing records of Commodore Sales Acceptance in its earlier days, which
made necessary extensive reconstruction of the accounts by the account-
ants employed by the Commission and the Montreal Trust Company.
The table shows, in columns corresponding to the various ledger
accounts of Commodore Sales Acceptance, individual loans and lending
operations, the level of the loans month by month between October
1961 and June 17, 1965, first of all in respect of the parent company,
Commodore Business Machines, and then in its rightward extension
loans of the subsidiaries, Commodore Drycopy Limited and Humber
Typewriters & Business Equipment Limited and the associated com-
panies, by virtue of their creation or ownership by Tramiel and Kapp,
Evermac Office Equipment Company Limited and Trans Commercial
Acceptance Limited. The final columns show total loans by Commodore
Sales Acceptance and total loans by it and its American subsidiary,
Commodore Factors, added together. The figures in brackets represent
a credit position for the borrower particularly applicable to reserve
accounts, and the Greek letter Phi indicates that the account has been
balanced off or flattened by payment, or by journal entry, in which latter
case the initials "JE" appear beside this symbol. The significance of
these journal entries will become plain later en, but it will be noted
at this point, and indeed not to notice it would be to miss the most
obvious feature of the table, that in December 1963 there was a whole-
sale transfer of indebtedness to Commodore Sales Acceptance from
Commodore Business Machines and its subsidiaries to the company
called Trans Commercial Acceptance, and a general reduction in interest
rates charged for loans made to that company from 12% to 8!/i%.
The effect of this was to substitute as a debtor to Commodore Sales
Acceptance a company with no invested capital and no assets, other
than its own loans receivable, for a manufacturing company with public
status and responsibilities and with substantial assets at the time of
transfer, and to deprive Commodore Sales Acceptance and, of course,
Atlantic of 3Vi% per annum of interest for the sake of inferior
security and a virtually worthless covenant to repay.
It will also be noted that in June 1962 the amounts due are
sharply reduced, and the journal entry records in this case the receipt
of funds on the first public issue of common shares by Commodore
Business Machines, all of which were paid to Commodore Sales Accept-
ance. The loans to Evermac Office Equipment are unusual in that they
'Exhibit 2137.
296
Chapter VIII
appear to have been paid directly, b) waj of further loan, to Commodore
Business Machines.
Some comment by the way is required, particularly as the column
. lings are taken exactly from the nomenclature used in the ledgers
of Commodore Sales Acceptance. For example, the second column
entitled "holdback reserve" is clearly a reserve for unearned interest in
connection with the long-term note receivable originating in November
1961. the amount of which is shown as being systematically reduced
right through until June 17, 1965. The column entitled "Kovo account
payable I2r'c credit'' reflects the practice of Commodore Sales Accept-
ance ensuring payment to the original Czechoslovakian supplier to
Commodore Business Machines by recording a loan to the latter, and
establishing a credit to Kovo to which it actually paid the amounts due.
Loans from Commodore Factors
Table 391 is a similar compilation showing the history of operating
loans made by Commodore Factors, the American subsidiary of Com-
modore Sales Acceptance, also with Atlantic money. It will be recalled
that the purpose behind the incorporation of Commodore Factors as a
wholly-owned subsidiary of Commodore Sales Acceptance in the State
of New York was to carry on the factoring and commercial loans
business with American borrowers, the funds coming directly from
Atlantic Acceptance. Commodore Factors also made loans directly to
Commodore Business Machines, but primarily to its American subsidiary
and associated companies. The oldest of these was Commodore Business
Machines Inc. which was jointly indebted to Commodore Factors
together with Herald Superior Office Equipment Company Inc..
Commodore Business Machines having a 50% interest in each company
until they were eventually merged under the name of the first. Commo-
dore Drycopy Inc. was a wholly-owned subsidiary of Commodore
Business Machines Inc., and A.C.E. Business Machines Inc., Jay-Man
Distributors Inc. and Baronet Associates Inc. were companies apparently
owned by Tramiel and Kapp. Commodore Factors lent money to Jay-
Man Distributors to buy goods from Commodore Business Machines
in a transaction similar to the loans made by Commodore Sales Accept-
ance to Evermac Office Equipment. Finally there is the same significant
transfer by journal entry, in June 1964, of all the outstanding indebted-
ness of these companies in consolidated form to Baronet Associates
Inc. which thereafter pays interest at the rate of SVi% per annum
instead of 12%.
The general effect of these tables is to show that by June 17. 1965
Commodore Business Machines owed directly to Commodore Sales
Acceptance the amounts payable in respect o\ a long-term note
'Exhibit 2138.
297
Commodore Business Machines
receivable and the 12% instalment notes transferred at the beginning
of 1963 from Commodore Factors, which were, in the aggregate, some
$328,872, and from which must be deducted $26,600 by way of holdback
reserve. It owed Commodore Factors nothing. Interposed between the
real debtors of the Commodore Business Machines group and their
Atlantic creditors were Trans Commercial Acceptance in the case of
Commodore Sales Acceptance, and Baronet Associates in the case of
Commodore Factors, owing almost all the combined loans of $2,039,-
753.75 as at June 17, 1965. The high point of these loans had been
reached in November. 1964 at a figure of $3,114,655.94, but in the
following month it had declined to $1,301,451.93 as a result of a
breathtaking transfer of the burden to British Mortgage & Trust
Con. ran\' in a series of transactions which must await more detailed
nation. A graphic depiction of the pattern of the borrowing of
the Commodore Business Machines group can be seen opposite,2
which shows how the rising curve of indebtedness to Atlantic com-
panies was arrested by payment over of the proceeds of public issues
and private placements of shares, debentures and notes referred to in
Table 37, generally, if not always with an eye to the year-end statement
at June 30, and in December, 1964, at least, with an interim six-month
statement in mind.
The Investment of British Mortgage & Trust
Wilfrid P. Gregory became a director of Commodore Business
Machines on November 20, 1963. He testified1 that he had high hopes
, >r the company, which had just finished purchasing and making a
payment on the Willy Feiler operation and was also setting up a plant
in Ereland with, as he said, the help of British Mortgage & Trust, and
a by that time the trust company had a substantial interest in the
securities of Commodore Business Machines, either by way of direct
investment or of loans made to persons who had borrowed from it to
invest in these securities and had pledged them. The investment began
with a purchase of common shares in the first public offering of June,
1962 for $25,000, and its progress may be observed on Table 402
which illustrates the British Mortgage & Trust position from that time
until Ma) of 1965. The first two columns record the investments by
British Mortgage & Trust in common shares and Series "A" debentures
which by May of that year amounted in the aggregate to $252,469.
The rest of the table shows loans made to companies and individuals
secured by Commodore Business Machines securities, and it will be
observed that Annett Partners Limited were indebted in the amount of
10,000 from April to December, 1963. Carman King, Douglas Annett
ibit 2139.
'Evidence Volume 116.
'Exhibit 2140.
298
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Commodore Business Machines
(both Annett partners), Manfred Kapp, Harry Wagman, W. L. Walton
and C. P. Morgan in the amount of $500,000, which in March of 1964
was transferred to Jack Tramiel and Messrs. Kapp, Morgan, Wagman and
Walton, was again transferred in April, 1965 to Messrs. Tramiel, Kapp,
Morgan and Wagman and remained outstanding at the end of the
period. Alan T. Christie borrowed $55,000 in December 1963 which
was paid off a year later; Chisholm & Co., which was Lambert & Co.,
borrowed $240,000 in March, 1964 and repaid the loan in November,
and Associated Canadian Holdings $200,000 in April 1964 which was
still outstanding in May, 1965. So it was with N.G.K. Investments
in the amount of $250,000. By far the largest of the loans made on this
basis was that of $1,500,009 to Trans Commercial Acceptance in
December, 1964 which, with a loan of $500,000 from Commodore
Business Machines itself, enabled it to purchase the whole private place-
ment of $1,000,000 63A% subordinated note and $1,000,000 6%
preferred share issue of Commodore Business Machines, referred to in
Table 37. By the end of May this loan had been reduced by only
$50,000, so that the total loans and investments secured by the shares
and obligations of Commodore Business Machines amounted at that
time to $2,652,469, of which $2,400,000 were loans secured by their
pledge as collateral. Two points should be remarked upon. The addi- K
tional $182,500 invested in common shares of Commodore Business
Machines in December, 1964 represented a purchase from C. P.
Morgan himself. These were sold, according to Gregory, under an i
informal verbal agreement reached when he, already a shareholder, had -
indicated British Mortgage & Trust would be interested in buying in the I
then rising market, and Morgan had said that, since he was buying
himself, he would let British Mortgage have half his purchases at his
own average price. As will be seen, Morgan was at this time a seller ::
rather than a buyer, and eventually British Mortgage held as owner,
or in pledge, some 20% of the common stock of Commodore Business h
Machines at an average price of $6 per share. Table 40 does not
show a large loan made to Morgan, because the securities lodged
as collateral included those of Commodore Business Machines with
others, and Mr. Woifman considered it neither practical nor fair to
include it, since he was unable to ascertain what value British Mort-
gage attached to some 16,000 common shares with a market value of
approximately $100,000 when they were first lodged as security.
The Price-Earnings Ratio of Common Shares
Another illustration is required to show at this point, and for future
reference, what information was available to lenders enabling them to
decide what a proper collateral value for Commodore Business Machines
securities should be, and this may be found at Table 41 1 showing
1Exhibit2141.
300
fe
Chapter VIII
information taken from the financial statements of Commodore Business
Machines, and the average price per share from year to year, derived
from evidence submitted by the Canadian Stock Exchange,2 which
permits comparison of market price with earnings per share. This
table, like its predecessors, considers all share values in the light of the
500-for-l split in the common shares authorized by the supple-
mentary letters patent of February 7, 1962. As at January 31, 1961
the net book value per share was SI .44, and by June 30, 1961, the end
cf the six months period reported consequent upon the change of
the fiscal year-end, had dropped to 58c because of the issue of an
additional 100.000 shares at a fifth of a cent a share. At June 30,
1962 the book value per share was S1.40. and at the same time in 1963.
$1.58 and in 1964, SI. 85: but at June 30, 1965 it was $1.18, the earnings
per share being in a loss position of SI. 063. Earnings per common
share were reported at the year ending June 30, 1962 as 18.5c, June
30, 1963 as 17. 5p and at June 30, 1964, 22.8c. Comparing earnings per
share, even as reported, with market price, it appears that during the year
ended June 30. 1963, the first in which a market price is applicable,
the stock traded from a low of $2.70 to a high of S4.75 per share, and
the market price varied between an equivalent of 15.4 and 27.1 times
earnings. For the next period, ending June 30, 1964, the ratio varies
between 16 and 22 times earnings. A.s has been observed, at June 30,
1965 a loss of $1,063 a share was recorded, although during the period
the stock traded between a low of $4.10 and a high of $10.50 up to
June 15, 1965. and thereafter declined to a low of $1.10 on July 14.
Thus, at a high point in price of $10.50 per share, the market was
apparently willing to pay, based on the last financial reports available
of June 30, 1964, as much as 45 times earnings for Commodore
Business Machines common stock.
Directors and Officers
Before beginning a detailed examination of how Atlantic funds
were injected into Commodore Business Machines, and the extent to
which the public in fact participated in its financing, it may be conveni-
ent to notice the names of the directors and officers who presided over
the destinies of the company from the date of incorporation on October
10. 1958 at least until the end of June. 1965. when it passed out of the
orbit of the Atlantic complex. The first four directors elected on
October 10, 1958, and retiring on November 5, were clearly the incorpor-
ators, Wolfe David Goodman and Robert Bernard Eisen. being solicitors.
and Edith Bateman and Alma Jane Paulson, being clerks in their office.
They were succeeded on November 5 by Helen Tramiel. Estelle Kapp,
Jack Tramiel and Manfred Kapp, the last two remaining as directors
'Exhibit 2132.
301
Commodore Business Machines
throughout the period. On October 3, 1960, the date of an important
directors' meeting, Mrs. Tramiel and Mrs. Kapp resigned, the vacancies
being filled by J. Aubrey Medland and Carman G. King and additional
directors appointed in the persons of C. William Streit and Harry
Wagman. Carl M. Solomon, of the company's solicitors, Messrs.
Solomon, Singer & Rosen, was added to the board at an equally
important meeting on December 15, 1961. On May 31, 1962 Medland
resigned in a moment of disenchantment, so that his name does not
appear on the prospectus as of that date advertising the first public issue
of common shares. He was succeeded by Benjamin H. Oremland, the
New York attorney introduced by Carl Solomon to the Atlantic scene,
who had incorporated Commodore Factors in June 1961, and who acted
for Commodore Business Machines in the transaction of its American
legal business. Oremland made room for the return of Medland as a
director on October 17, 1962, and on the same day there were elected
Fenimore Fisher, general manager of Analogue Controls Inc., C. Powell
Morgan and Douglas R. Annett, a vacancy having been created on
August 9, 1962 by the resignation of Streit and two more by enlarge-
ment of the board to nine on October 17. Annett resigned on November
20, 1963, being replaced by another stockbroker, Rennie A. Good-
fellow, and, as has been seen, Wilfrid P. Gregory also joined the board
on that date. King, Morgan, Medland and Gregory all resigned on
June 22, 1965, a week after the Atlantic default, leaving Tramiel, Kapp,
Wagman, Solomon and Goodfellow in office. During their terms as
directors Mrs. Tramiel was president and Mrs. Kapp secretary-treasurer
of the company; they were succeeded by their husbands on October 3,
1960, Medland, King and Streit becoming vice-presidents at that time.
This appointment as vice-president, which Medland said had been
conferred upon him without his knowledge, was at least the ostensible
reason for his resignation from the board on May 31, 1962.1 He was
succeeded in office by Harry Wagman, who on November 20, 1963 also
became treasurer and assistant secretary, Kapp becoming a vice-president
on the same date. The office of vice-president was also conferred on
Fisher, and when Morgan became a director on October 17, 1962, he
assumed and held thereafter until his resignation the position of chair-
man of the board.
Early History of Common Share Transactions: The Purvin Agreement
The motives of the prime movers in the affairs of Commodore
Business Machines, and the scale of their operations, can only be fully
appreciated by an examination of the transactions in the company's
snares. Although many of these were so conducted as to give at least
a false appearance, and at most complete concealment of their real
'Evidence Volume 92.
302
Chapter VIII
nature, the records available will appear to be voluminous. A start
may be made with the corporate records of the company, and here it
should be said that the minute books of Commodore Business Machines,1
and particularly of the period during which it was known as Commo-
dore Portable Typewriter Limited, bear traces of altered dates and other
corrections of the record, and cannot be regarded as entirely reliable.
However they are what they are, and no one can complain, particularly
those responsible for them and for the state in which they were examined
by the Commission, if inferences are drawn from what they purport
to say. The assistance of yet another table must be invoked to illustrate
what follows and to make it intelligible. This is Table 42, 2 described as
a "history of common share transactions from incorporation to the date
of the first common share underwriting." It shows on the various dates
the numbers of shares issued and transferred from November 5, 1958
to just before this issue, the total shareholdings, the total amount paid
and the price per share opposite the names of the principal share-
holders, most of whom will be familiar to the reader. In the beginning,
on November 5, 1958, the minute book and share certificate book of
Commodore Portable Typewriter record the issue of 99 common shares
to Helen Tramiel, 99 to Estelle Kapp and one share each to Jack
Tramiel and Manfred Kapp, a total of 200 shares which the books of
account record as being paid for in the amount of $200. Thus the
situation remained until October 3, 1960, these four persons being all
the directors and, indeed, all the shareholders of the company, and only
two meetings of the board intervened, one on March 21, 1960 and one
apparently on June 17, 1960, if the obviously altered date is to be
relied upon, in conjunction with the annual meeting on the same day.
On October 3 a number of important decisions were taken by the board
and are recorded in a lengthy minute. The meeting was attended by all
the directors, and by Messrs. C. Powell Morgan, H. Wagman and D. M.
Samuel at the invitation of the board. Mrs. Kapp on that occasion
resigned as a director, and assigned her 99 common shares to the
following transferees in the indicated amounts:
Carl M. Solomon 23
J. Aubrey Medland 20
Harry Wagman 20
C. William Streit 15
C. Powell Morgan 10
David M. Samuel 3
Carman G. King 8
Mrs. Tramiel also resigned as a director and transferred her 99 shares
to C. Powell Morgan, who thereupon declared that he held the 109
Exhibits 322 and 342-4.
•Exhibit 2142.
303
Commodore Business Machines
common shares thus acquired in trust for Jack Tramiel as to 36,
Manfred Kapp as to 36 and Regina Silberman as to 37. J. Aubrey
Medland, Carman G. King and C. William Streit then were appointed
directors to fill the two vacancies created, and to comply with a special
resolution increasing the number of directors from four to six.
It may be noted parenthetically, and at the risk of a digression
from the theme of share transactions, that at the same meeting a floating
charge debenture to secure repayment to Commodore Sales Acceptance
of sums advanced, or to be advanced, up to $500,000, with interest at
the rate of 1 5 % per annum, was also authorized, but it transpires from
the minutes of a meeting purportedly held on January 6, 1961 that no
such debenture had been executed, and that the company was, as of that
date, indebted to Commodore Sales Acceptance in the amount of $877,-
588.47. In the event such a debenture, to secure repayment of
$1,200,000, was again authorized and an unexecuted copy thereof
annexed to the minutes. The fact that on this occasion the affidavit of
bona fides was prepared for the signature of C. P. Morgan, as president
of the "mortgagee", is reassuring in view of the trouble laid up for
himself by Carl Solomon shortly after, on December 21, 1960, when he
annexed to an assignment of book debts in favour of Commodore Sales
Acceptance by Aurora Leasing Corporation an affidavit by himself as
president of the assignor, thus imperilling the whole security. Ratifica-
tion was also given to an agreement between Herald Square Business
Machines Inc., Superior Typewriter Co. Inc., Commodore Portable
Typewriter, George Purvin, Jack Tramiel, Manfred Kapp and Commo-
dore Sales Acceptance, already executed and dated June 28, 1960,
whereby the company acquired the business of two New York
companies, called Herald Square Business Machines Inc. and Superior
Typewriter Co. Inc., in which one George Purvin had an interest. The
agreement, an unexecuted copy of which is annexed to the minutes, is
lengthy and involved, but the gist of it is that Herald Square and Superior
Typewriter were to be wound up after Purvin had acquired the remaining
shares from members of his family for $25,000, to be advanced to him
by Commodore Portable Typewriter, and that two new companies
were to be incorporated, one called Superior Typewriter Sales Inc.
(which in fact became Herald Superior Typewriter Sales Inc.) and
Commodore Business Machines Inc., both in the New York State juris-
diction, that the inventory of Herald Square and Superior Typewriter
was to be transferred to Herald Superior, and certain leases of store
space which the two existing companies had in American department
stores, such as Macy's and Bamberger's, should be assigned to it, and that
Commodore Business Machines Inc. should act as the exclusive agent
for Commodore Portable Typewriter for the sale of the latter's products
to dealers in the United States, including Herald Superior, and finance
its inventory purchases. The shares of the two new companies were to
304
Chapter VIII
be owned equally by George Purvin and Commodore Portable Type-
writer, Purvin's shares to be lodged with the latter as security for the
repayment of a loan of $25,000; loans to the new companies were to be
arranged for by both Purvin and Commodore Portable Typewriter, and
Commodore Sales Acceptance, somewhat quaintly called the "comp-
troller", was "to render financial and administrative advice and assist-
ance" to the New York companies, and to Commodore Portable
Typewriter, for an annual fee of $10,000.
Minutes of a directors' meeting held on April 18, 1961, and
attended only by Jack Tramiel, Manfred Kapp and Harry Wagman,
contemporaneous as will be recalled with the transactions whereby
Atlantic Acceptance Corporation acquired entire ownership of its sub-
sidiary Commodore Sales Acceptance, begin with the authorization of
the issue, as fully paid and non-assessable, of 25,000 preference shares
to Benjamin Silberman as to 6,666 shares, Helen Tramiel as to 9,167
and Estelle Kapp as to 9,167, for which $25,000 is recorded as having
been paid. This issue was made to pay the company's debt to Mrs.
Tramiel and Mrs. Kapp, arising from the purchase of their common
shares of Commodore Sales Acceptance for $25,000 by C. P. Morgan,
and the crediting of the amount of the purchase price to Commodore
Portable Typewriter as part of a $50,000 credit, for which Manfred
Kapp directed journal entries to be made recording that his wife and
Tramiel's had paid a debt of the company to Commodore Sales Accept-
ance, and were in consequence creditors.3 The issue at this time to Ben-
jamin Silberman is unexplained, except as a settlement of a debt to this rela-
tive of Jack Tramiel by the Tramiel and Kapp families. The minute pro-
ceeds to record the authorization of an agreement, dated 18 April,
between Commodore Portable Typewriter and George Purvin, providing
for the purchase by the company of the latter's 50% interest in the
stock of Herald Superior Office Equipment Inc. and Commodore Busi-
ness Machines Inc. for 200 of the company's common shares, at their par
value of $ 1 each, which were to be allotted to C. P. Morgan in trust by the
terms of a second agreement, whereby Purvin, Morgan and the company
agree that they shall be so held until Purvin pays his debt of $25,000.
An unusual provision of the second agreement is that Purvin will be at
liberty to sell or transfer half of the 200 common shares to such persons
as he may, in his sole discretion, designate. Both these agreements are
annexed to the minutes in their original and executed form. Then on
April 25, according to the company's records, the same three members
of the board who had been present on April 1 8 met again, and author-
ized the transfer of 100 common shares of the company's capital stock
from C. Powell Morgan in trust to C. Powell Morgan. Annexed to the
minute of this meeting is an original executed agreement between
•Evidence Volume 87.
305
Commodore Business Machines
George Purvin and C. Powell Morgan, providing for the sale by Purvin
of 100 shares to Morgan for the sum of $1. Significantly enough, this
agreement is also dated April 18, 1961.
Both Purvin and Tramiel have described the transaction, the
former in an examination under the Securities Act4 and the latter in his
evidence given before the Commission.5 In short, Purvin received 50%
of the shares of the parent company in exchange for 50% of the shares
of the subsidiaries, Herald Superior and Commodore Business Machines
Inc., and immediately transferred half of them to Morgan. Morgan
thereby received 25% of Commodore Portable Typewriter for nothing.
Purvin said that at no time did he think he was to get any more than
25 % of the common stock of Commodore Portable Typewriter, in spite
of the requirement to pledge what was in fact 50% of the outstanding
shares, and he paid little attention to the formalities of his agreement
with Morgan who had always been charming and kind to him, and
played the role of pacifier in the many disputes which had arisen be-
tween him and Tramiel and Tramiel and Kapp. He was at this time
disillusioned about his business association with Tramiel whom he had
known in the typewriter business since 1959. He knew that the Herald
Superior business was losing money, and he objected to Tramiel's reck-
less expenditure on advertising.
His account given on oath of one example of Tramiel's business
methods should be reproduced.6
"A. And then one fine day a cheque was put in front of me to sign for
Income Tax. I don't recall the exact amount, but it was in three figures.
The figure of around $3,000 or $3,500 comes back to me, but I couldn't
be sure that that was the amount. I demanded to know 'How come we
are paying Income Tax when we are losing money' and the conversations
were that this is the way it worked out, and I took the physical inventory
myself, and that if you add it up it comes out that way.
Q. With whom did you have this conversation?
A. With Jack.
O. Tramiel?
A. Yes.
Q. Yes?
A. And I went into the office and took out the physical inventory sheets,
yellow sheets, pages and pages and pages of them, and some of the
figures that I had put in were changed to higher figures.
Q. How was this done?
A. I beg your pardon?
'Exhibit 4890.
"Evidence Volume 84.
•Exhibit 4890, p. 25.
306
Chapter VIII
Q. Was it done by adding a zero, or what?
A. No. You could see my numbers where I had taken these sheets and
valued the items one by one, and then you could see — I did it in pencil,
and it was erased and another figure was put in.
Q. Approximately what amount?
A. Well, I was speaking of specific items. One item in particular was
the Remington electric typewriter which, as regards that particular model,
had certain mechanical defects which made the sale very difficult. Never-
theless the allowance for the machine — do you understand what I mean
by 'allowance'?
Q. No.
A. That is what the manufacturer will pay in trade if you buy a new one
from him.
Q. Yes?
A. So the manufacturer's allowance is sometimes lower, is sometimes
higher and is sometimes about the same as the wholesale market value.
The factors of supply and demand operate here, but not in cases where
you have a defect, where the machine is not saleable; but the manu-
facturer, Remington, could not very well say 'Our machine is no good
so we will not give you anything back for it when you take it in trade'.
Do I make myself clear?
Q. Yes.
A. There were quite a number of those machines and I had to value
them. I think I put them in for $15 apiece when the allowance was
possibly $100, or in the case of a high serial number it could have been
even higher; but on the basis of cost or market, whichever is lower, to
have put them in at any higher figure than that, I felt would have been
fooling ourselves. Being in the used machine business for so many years,
it has always been the policy of people in the used machine business to
value inventory low; it is almost a reserve that you set up there for such
things as new models obsoleting other items. It is a kind of junk busi-
ness when you get right down to it, and where I saw the figures changed
I was much upset on that.
Q. You had valued them at $15 each. To what amount were they
changed, do you recall?
A. I think it was over $100.
Q. How many machines?
A. A couple of sheets of them.
Q. Is this a hundred or more?
A. Yes, I would say about a hundred machines. I don't recall offhand.
Actually at the time I didn't sit down to see what the difference in value
was. I didn't care any more — just the whole idea of my valuing an
inventory and then having it changed and not being told about it, just
further confirmed the idea in my own mind that I wanted to get out.
307
Commodore Business Machines
Q. Did you call this change to Mr. Tramiel's attention?
A. Yes, I did.
Q. What did he say?
A. He said: 'Look at the allowance, George', and then I began to
scream to Mr. Morgan. I mean, this was no roundabout matter. I just
directly, in front of Jack, told Mr. Morgan that if I have any respon-
sibility, in his mind, for him to get back his money, I want him to sit
down and let us untangle this thing and see what is what. 'The firm is
definitely losing money, and I don't want to be the President of a com-
pany that is losing money', were my actual words.
Q. What did Mr. Morgan say?
A. I am hesitating because I had many conversations with Mr. Morgan
about this particular situation. The conversation which stands out in my
mind is a conversation I had with him when I took him back to the Hotel
Park Sheraton and put it on the basis that I would defer to his judgment
on this thing, and is there anything wrong with my thinking, am I looking
at this thing upside down, and so on. He said to me at that time that he
much appreciated my keeping him advised on all of these matters, and I
agreed at the time to send him monthly reports of how the operations
were progressing, and he said : 'George, Jack Tramiel has a way of going
into places where angels fear to tread and coming home with the bacon'."
Tramiel, in his evidence given on oath before the Commission on
November 30, 1966, said that he knew nothing about the separate trans-
action between Purvin and Morgan whereby the former conveyed 100
shares to the latter for $1, although he had agreed that the minutes
of April 25, 1961, signed by himself and Kapp, recorded it. He trusted
Morgan and thought that he only wanted the shares for additional secur-
ity. He knew nothing about it, and he agreed that, if the shares were for
Morgan personally, the transaction was improper. He could not suggest
any reason why Morgan would take the shares in his own name, having
previously held them in trust, if it were not to assert his own personal
ownership in them. On being shown by counsel a copy of a letter from
Morgan taken from the files of Solomon & Samuel, dated April 25, 1962
and beginning "Dear Jack and Manny", acknowledging that he held
certificate No. 26 for 100 shares for himself, Tramiel and Kapp as bene-
ficial owners in the proportion of 33 Vz shares each,7 he admitted that
his understanding of the transaction, when all was over and done with,
was that he, Kapp and Morgan each held a one-third interest in 109
shares, and a one-third interest in 200 shares, out of the 400 issued com-
mon shares of Commodore Business Machines. The letter should be
quoted in part:
"I, the undersigned hereby acknowledge the following:
(a) I presently have in my possession 2 share certificates issued to
C. P. Morgan, in Trust, by Commodore Business Machines (Canada)
'Exhibit 2146.
308
Chapter VIII
Ltd., for (#11) 99 and (#21) 10 shares respectively. I hereby acknowl-
edge that I am holding the said Certificates for the following individuals:
Manfred Kapp 36 shares
Helen Tramiel 36 shares
Benjamin Silverman 37 shares
The ownership of these shares was previously set forth in a written
agreement between the parties.
(b) I also have in my possession share certificate #24, issued by
Commodore Business Machines (Canada) Ltd., to C. P. MORGAN, in
Trust, for 100 shares of stock. I hereby acknowledge that the stock
represented by the said Certificate is beneficially owned as follows:
Manfred Kapp 33VS shares
Jack Tramiel 33V& shares
Mildred Morgan 33VS shares
(c) I hereby further acknowledge that I presently also hold Certificate
#26, issued by Commodore Business Machines (Canada) Ltd., to C. P.
MORGAN for 100 shares. The stock represented by the said Certificate
is beneficially owned as follows :
Manfred Kapp 33V$ shares
Jack Tramiel 33V$ shares
C. Powell Morgan 33VS shares"
The beneficiaries of the 109 shares had been apparently changed from
Regina Silberman to Benjamin Silberman in respect of 37 shares, and
from Jack Tramiel to Helen Tramiel, in respect of 36 in the record of
these holdings in the minutes of October 3, 1960.
With Tramiel's recollection thus refreshed, the examination pro-
ceeded as follows:8
"MR. SHEPHERD: But your recollection does not extend, I take it,
to the manner in which Mr. Morgan acquired those shares from Mr.
Purvin on the very day that Commodore Portable Typewriters issued
200 shares for Mr. Purvin's interest in the subsidiary, is that correct?
A. That's right.
Q. And Mr. Purvin never told you about any such arrangement, is that
so?
A. That's right.
Q. Mr. Morgan never told you, Mr. Kapp never told you?
A. Not that I can recall.
Q. Can you assist us at all as to why Mr. Solomon, perhaps you can't,
would have in his files a copy of such letter?
•Evidence Volume 84, pp. 11415-22.
309
Commodore Business Machines
A. Maybe Mr. Kapp asked him for it, I didn't live in the United States
at that particular time.
Q. So ... ?
A. I am sorry, I lived in the United States at that time and this was
written here to our Canadian office and I wasn't following up what
correspondence there was from the solicitors.
Q. And Mr. Tramiel, we have it quite clearly, do we not, upon your
oath that you knew nothing about the transfer of those 100 shares to
Mr. Morgan contemporaneously with the issue of the 200 shares to Mr.
Purvin?
A. To answer your question I don't recall anything about those 100
shares at the present moment.
Q. Is that a little different from what you told me before?
A. I don't think so.
Q. You mean you may have known at the time and forgotten about it
since?
A. The way you are putting it to me you know this is a number of
years and the way you are saying if ever, to me it wasn't important at
all because I always look at the last figure, I knew that I had a third
of 200 shares. I trusted Mr. Morgan. I never had any doubts that he
wants to do something that isn't right, even if he did mention to me
which I don't remember at the present time I wouldn't even — it wasn't
important to me.
Q. Surely, Mr. Tramiel, if your company, which was not then wholly
owned by you three, if you had 200 shares upon the representation
that number of shares, being 50% of the issued capital, was required
to be issued to acquire an asset of Mr. Purvin's and you had known at
that time that Mr. Purvin would immediately give up for one dollar half
of those shares that would have stuck in your mind, would it not?
A. It would.
Q. Yes. Is there anything more at all that you can tell us respecting
the acquisition of the 200 shares by yourself and Mr. Morgan and Mr.
Kapp so far as we have gone up to the moment?
A. No.
Q. Now, you said that you and Mr. Kapp and Mr. Morgan paid
$25,000 to Commodore Portable Typewriters in satisfaction of Mr.
Purvin's debt respecting what we now know to be a — though you have
stated that you thought — we now know to be 100 shares and you have
stated you believe it to be 200 shares, you said that you paid it, is that
correct?
A. I believe we did.
Q. Where did you get the money to pay it?
A. Must have been borrowed from Commodore Sales Acceptance.
310
Chapter VIII
Q. Do you recall whether you and Mr. Morgan and Mr. Kapp
borrowed the money from Commodore Sales Acceptance?
A. I don't recall.
Q. I should, in fairness, tell you, Mr. Tramiel, that those shares were
in fact treated as having been paid for by Mrs. Kapp and Mrs. Tramiel,
does that assist you at all?
A. No.
Q. Just while we are on that point, may we safely take it that where
shares stand in the names — or shares of Commodore Portable Type-
writers or Commodore Business Machines stand in the name of Mrs.
Kapp and Mrs. Tramiel that you and Mr. Kapp are respectively the
beneficial owners of them, is that correct?
A. Yes.
Q. The books indicate, Mr. Tramiel, that these moneys were received
or are recorded as being received in American funds, does that assist
you at all? $16,000 of these moneys were recorded as having been
received in American funds?
A. I don't know.
Q. Is it your position then, Mr. Tramiel, that Commodore Portable
Tyepwriters was repaid in respect of the Purvin loan, that so far as
you personally are concerned, your recollection is that at least your
share of the moneys paid on behalf of Mrs. Tramiel were borrowed,
but precisely the source from which they were borrowed, you cannot
now recall?
A. This is about correct. I believe it was borrowed.
Q. Yes. Do you recall whether it was borrowed from Commodore
Business Machines Incorporated?
A. No, definitely wouldn't be borrowed from Commodore Business
Machines.
THE COMMISSIONER: I beg your pardon?
A. It wouldn't be borrowed from Commodore Business Machines.
MR. SHEPHERD: Do you recall whether the loan, from whatever
source it was borrowed, was ever repaid by you and Mr. Morgan and
Mr. Kapp or your wives?
A. It must have been repaid.
Q. Do you have a recollection of repaying it?
A. The exact dates, no I don't, but I know everything we borrowed
we have paid back and I don't recall exactly when it was borrowed
or when it was paid back.
Q. Is there anything more you can tell us on the 200 shares issued
to Mr. Purvin or do we have the whole truth from you?
A. I have a letter here — was confirmed to Mr. Kapp.
311
Commodore Business Machines
Q. Yes?
A. From Mr. Oremland.
Q. Yes?
A. On October 20th, 1961, where it specifically states that for the
$25,000 Mr. Purvin will resign from Commodore Portable Type-
writers, turn over all the shares, etc., etc., nothing to do with the 100
shares but all the shares.
Q. Well, just grant me a moment.
A. And it is important here also it states Mr. Purvin's shares are now
being held by Mr. Morgan.
Q. Is that a letter of the 20th of October, 1961 addressed to Commo-
dore Portable Typewriters from Mr. Oremland?
A. Yes.
MR. SHEPHERD: Yes, he refers, Mr. Commissioner, the witness is
referring to a copy of Exhibit 2145.
Q. I show you, is there something you wish to say about that, Mr.
Tramiel?
A. And also enclosing here the original resignation and showing the
shares originally owned by Mr. Purvin were being held by Powell
Morgan.
MR. SHEPHERD: Now, could I have 2144, please?
Q. Let me show you a letter to Mr. Purvin, Exhibit 2144, dated the
9th of October, 1961, relating to this transaction purporting to be
signed 'Jack Tramiel'. Is that a letter sent by you?
A. Signed by me.
Q. Signed by you, yes, and the first part of the letter reads:
'My dear Mr. Purvin:
We hereby acknowledge our understanding and agreement to the
following effect:
Factual Background
You, heretofore, were the owner of 25% of the issued and out-
standing stock of our Corporation. You are indebted to our Cor-
poration for the sum of $25,000.00 which obligation was heretofore
evidenced by a negotiable promissory note. The stock owned by you
in our Corporation was put up in escrow with C. Powell Morgan as
escrow agent as collateral security to secure payment of the obliga-
tion due to us under the aforesaid note.'
And then the letter goes on to deal, does it not, with how Mr. Purvin's
interest will be purchased in return for the cancellation of Mr. Purvin's
note of $25,000?
A. Yes.
Q. Is that correct?
A. Yes, the letter was signed by me.
312
Chapter VIII
Q. If you thought that you were dealing with 200 shares of Commodore
Business Machines of which there were then 400 outstanding, why do
you open your letter: —
'You, heretofore, were the owner of 25% of the issued and outstand-
ing stock of our Corporation.'
A. Because of this document, I am almost sure, must have been pre-
pared by our attorney and I didn't even check the percentage.
Q. But you signed it, Mr. Tramiel?
A. I did, I did.
Q. So on the 9th of October, you are offering to buy 25 % , this is the
interest you heretofore held for Mr. Purvin, but you assert that really
you believed there was still, beneficially owned by him and available for
sale by him on that day, 200 shares which is 50%, is that correct?
A. Yes."
Carl Solomon testified that he had been instructed to draw the
agreement between Purvin and Morgan, and the minutes which approved
the transfer of 100 shares for $1, and agreed that, since all the agree-
ments which he had drawn in the Purvin affair had the same date, they
represented one transaction. His instructions came from Morgan, Tra-
miel or Kapp, but he did not recall from which one of them specifically,
or what the intention of the parties was at the time. Manfred Kapp,
whose evidence was throughout more straightforward than that of
Tramiel, althought on some points not necessarily more credible, recol-
lected the transaction clearly,9 but did not remember playing any par-
ticular part in the negotiations with Purvin, even though in the minutes
of April 18, 1961 he was recorded as having presented it to the board
of directors. He explained this by saying that Morgan was always the
hidden presence at these meetings, although he was not then a director,
and that it was his presentation which was attributed by the draftsman
to Kapp. He recalled the agreement between Purvin and Morgan, and
acknowledged that the directors' meeting of April 25 must have occurred
because he had signed the minutes, but he went on to say that in his
opinion this was just a formality undertaken to fulfil some whim of
Morgan's. He had always felt that George Purvin was beneficially en-
titled to 200 shares.
Morgan, Tramiel and Kapp Hold 25% of
Commodore Portable Typewriter
The significance of this transaction, which was not apparent to
Purvin, but which, in my view, was thoroughly understood by Morgan,
Tramiel and Kapp, was that 25% of the issued common shares of Com-
modore Portable Typewriter found its way into the hands of these three
•Evidence Volume 88.
313
Commodore Business Machines
without costing them even the. dollar that was represented to have been
paid, and without the knowledge of any of the directors except Tramiel,
Kapp and Wagman, who alone were present according to the record at
the meetings of April 25 and April 28. To be sure King, Streit and
Medland, on pieces of paper in the minute book oddly different in colour
to those of the minutes themselves, waived notice of these meetings and
consented to their being held and to the transaction of such business as
might come before them. The irregularity, and indeed the fraudulence
of the whole affair is aggravated by the failure to disclose its true nature
in the prospectus of the 300,000 common share public offering in the
following year, a failure indeed which, because the company itself was
not involved in the transaction between Purvin and Morgan, was not
technically in breach of the Securities Act of Ontario as it was then con-
stituted. Purvin, after a final argument, withdrew in disgust and alarm
from his association with Commodore Portable Typewriter on October
9, 1961, as was reported to the company by Benjamin Oremland in a
letter dated October 20. x For the cancellation of his note for $25,000
he delivered up his interest in the 100 shares still held in trust for him
by C. P. Morgan, and Oremland advised Commodore Portable Type-
writer that it should obtain a release of these shares from Morgan, attach
Purvin's assignment to them and transfer them on the books of the com-
pany into the category of treasury shares. Oremland was not, of course,
aware that in Ontario a company could not buy back its own shares,
and this part of the transaction was eventually recorded as having been
arranged by a loan from Mrs. Tramiel and Mrs. Kapp for whom a
"notes payable" account in the sum of $25,000 was set up in the com-
pany's books, the shares remaining in the hands of C. P. Morgan in
trust. George Purvin is now a schoolteacher, but has not forgotten Jack
Tramiel, and in his evidence given on February 3, 19672 recalled with
feeling an occasion on which the latter had said to him, "George, you
are no business man; you sell typewriters and I'll sell stock".
Thus Commodore Portable Typewriter rid itself of the connection
which had introduced it to the lucrative leasehold outlets in large depart-
ment stores of the eastern United States, and acquired sole ownership of
its subsidiary Commodore Business Machines Inc. with which Herald
Superior was merged. At this point there were 400 common shares out-
standing, issued at a price of $ 1 each, which in the climatic meeting of
the directors on December 15, 1961 were to be split 500-for-l, becom-
ing 200,000 shares issued at Vs0 each. The minutes of this meeting
show C. P. Morgan as holding 309 of the 400 old shares in trust, and
record the authorization and issue of a further 562 old shares for a total
price of $212,550. The recipients were C. William Streit as to 125,
J. Aubrey Medland as to 125, Carman G. King as to 62 and "Don
'Exhibit 2145.
•Exhibit 4890.
314
Chapter VIII
Mills" as to 250, as consideration for the cancellation of the indebted-
ness of Commodore Portable Typewriter to Streit in the amount of
$44,900, Medland $44,900, King $22,750, and Don Mills $100,000.
Streit and Medland had originally lent $50,000 each to the company,
and King $25,000, in 1960, Streit and Medland having been each
repaid $5,100 and King $2,250. The issue of an additional 70 old
shares was also authorized at this meeting; Helen Tramiel received 26,
Estelle Kapp 26 and Benjamin Silberman 18, to redeem the preferred
shares held by them in the aggregate amount of $23,250. All of these
transactions are explicable as a consequence of what has gone before,
except the status and identity of Don Mills which was not understood at
the time, other than by a select few and familiar individuals.
Identity of "Don Mills"
In the files of Aurora Leasing Corporation the Commission's in-
vestigators found a memorandum directed to the company, and dated
January 18, 1962,1 saying, "This is your authority to issue directly to
Commodore Portable Typewriter Co. Ltd. a cheque for $100,000.00
and charge to account of Don Mills". It was signed "Don Mills" and
subscribed by "Jack Tramiel" and "Mfd. Kapp". In handwriting at the
foot were the words "Returned note of 100,000 dated Jan. 29/62 on
Feb. 7/63", below which is "Received above note — Mfd. Kapp". On
the following day an Aurora cheque,2 signed by H. Wagman, was issued
to Commodore Portable Typewriter in the amount of $100,000, Aurora
borrowing the money to cover it from Commodore Sales Acceptance.
Commodore Portable Typewriter had a special account with Commo-
dore Sales Acceptance in respect of an indebtedness of $100,000, and
used this money to pay it off. Commodore Sales Acceptance thereafter
treated the $100,000 as being a loan to Aurora and not, of course, to
Commodore Portable Typewriter. No security was given to Aurora for
the loan to Don Mills except the latter's note. It is appropriate now to
quote the rest of the letter addressed by Morgan to "Jack and Manny":3
which is as follows:
"(d) I hereby further acknowledge that I presently hold in my
possession Certificate #30 issued by Commodore Business Machines
(Canada) Ltd., in the name of DON MILLS, for 250 shares. The
shares represented by the said Certificate are beneficially owned as
follows:
Manfred Kapp 83V4 shares
Jack Tramiel 83 V3 shares
C. Powell Morgan 83!/3 shares
Exhibit 1629.1.
•Exhibit 2148.
•Exhibit 2146.
315
Commodore Business Machines
(e) I hereby further acknowledge that a certain note in the sum of
$100,000.—, made payable to AURORA LEASING CORPORA-
TION, by DON MILLS, which was signed by Manfred Kapp and Jack
Tramiel in behalf of DON MILLS, is truly the liability of the following:
Manfred Kapp 33V3%
Jack Tramiel 33Vs%
C. Powell Morgan 331/3%
In connection with this obligation, each of the undersigned hereby
agrees to pay their proportionate share of the obligation as and when it
becomes due and payable.
I am giving you this letter so that our understanding may be in
writing."
It is therefore evident that Don Mills was an equal partnership between
Morgan, Tramiel and Kapp, but it was by no means evident at the time,
and its true identity then, as will be seen, was carefully concealed.
Simply stated, the transaction amounts to this. The minutes of the direc-
tors' meeting of Commodore Portable Typewriter, dated December 15,
1961, issued to Morgan, Tramiel and Kapp, in the guise of Don Mills,
250 of the company's old shares, or 125,000 of its new shares, in satisfac-
tion of a loan of $100,000 which had not yet been made, and was not
to be made until January 18, 1962, at which time the money left the
coffers of Commodore Sales Acceptance and travelled through Aurora
and Commodore Portable Typewriter back to Commodore Sales Accept-
ance, creating an indebtedness from Aurora to Commodore Sales
Acceptance, and from Don Mills to Aurora, of $100,000. It was, of
course, Atlantic money lent by Atlantic's subsidiary to a creature of
Atlantic's president, and by it to Morgan himself and his associates Tra-
miel and Kapp, the result being that the company which they controlled,
Commodore Portable Typewriter, improved the state of its accounts
with Commodore Sales Acceptance, and they themselves strengthened
their grip on its equity, with a public issue of shares in prospect, without
putting up any money. The 250 shares were unencumbered by pledge,
and represented almost a quarter of the 1,032 shares issued as a result
of the deliberations of December 15; 559 of them were held by Morgan,
Tramiel and Kapp.
When Morgan gave his last evidence to the Commission the very
limited time at his disposal prevented any exploration of the identity of
Don Mills, but his evidence on the subject taken on October 29, 1965,
long before there was any question about his health, in an examination
for discovery in the bankruptcy of Evermac Office Equipment Com-
pany Limited should be recorded, since it contains excerpts of the
evidence of Jack Tramiel taken in the same matter. His answers given
316
Chapter VIII
on oath to Mr. D. E. Baird, examining on behalf of the trustee, were
as follows:4
"Q. Were you aware of the fact that Evermac purchased shares of
Commodore Business Machines from a company known as Don Mills'?
A. I was unaware of where the shares came from.
Q. Are you familiar with the company known as Don Mills?
A. No.
Q. Have you ever had any dealings with a company known as Don
Mills?
A. I think Don Mills is a customer of Aurora but I don't know the com-
plete set of facts. I don't have the records of Aurora. You asked this
question before and I tried to recall but I can't recall the exact specifics.
Q. I am advised that Valley Farm and Enterprises Limited sold certain
shares of Commodore Business Machines to a company known as Don
Mills. Are you aware of that?
A. I would have to check that.
Q. I understand that Mr. Tramiel and Mr. Kapp have signed documents
on behalf of Don Mills?
A. I can't recollect anything in connection with Don Mills.
Q. Is Don Mills a limited company?
A. I don't know what it is. I can't recall the set up at all.
Q. I questioned Mr. Tramiel as to who Don Mills was. I asked him,
or he was asked concerning Don Mills. His answer was —
'I have formed this company as an individual because Commodore
Business Machines (Canada) Limited or Commodore Business Ma-
chines Inc. in New York had made a large purchase of machines from
a company called Remington Rand. This particular company called
Don Mills supposed to be a guarantor for the purchase. That was
the only way it could be done. Remington was not looking at the
assets. They were looking there should be a company in the middle.
This is why this company was formed and I would like to say after.
the company was not doing any business because it served the pur-
pose the same way and always got involved back to C. P. Morgan.
Q. Was this transaction with Remington Rand prior to your associ-
ation with Mr. Morgan?
A. No, it was not prior to the association with Mr. Morgan. It was
after the association with Mr. Morgan but this was when it was
formed. It was a deal strictly to do with Commodore Business
Machines Inc. or Limited.
Q. What did the company do after that0
A. It was involved wherever Mr. Morgan gave instructions and 1
can't — I don't recollect all the transactions tlicv did.'
'Exhibit 3670, pp. 96-100.
317
Commodore Business Machines
A. I don't know anything about it. I don't know what he is driving at.
I can't make sense out of it.
Q. I am advised that Aurora loaned money to a company by name of
Don Mills. Why would Aurora have loaned money to this company?
A. Mr. Farlinger was asking me about this same transaction and we
haven't been able to find the transactions at all in the books and I can't
say. I am still looking for the answers.
Q. I questioned Mr. Tramiel at page 46 of his examination at question
229—
'Did you sign documents on behalf of this company, Don Mills?
A. Could be.
Q. On whose instructions did you sign those documents?
A. On the instructions of Mr. Morgan.'
A. This isn't true.
Q. I questioned Mr. Tramiel at page 45 of his examination —
'Who was Don Mills? Is it a company by name of Don Mills? Is it
a person, or what is it?
A. I think — I don't know if it was a company or a partnership or it
was something —
Q. Who was involved in it?
A. Mr. Morgan.
Q. Did you have any dealings personally with that outfit or company,
or business by name of Don Mills?
A. On the same basis as Evermac'
A. What does that mean?
Q. This means — I interpret this answer to mean he was acting as your
nominee for any transactions with the company known as Don Mills. Is
that correct?
A. That is not correct. I can't — not having knowledge of the trans-
actions being inquired into, all I can say is that I can't recall anything
in connection with it.
Q. The specific transaction I am referring to is the purchase of 17,500
shares of Commodore Business Machines through Don Mills by Evermac.
Are you familiar with this?
A. No. All I know is the 17,500 shares that N.G.K. acquired from
Evermac in return for Pearlsound."
By January 25, 1966 Morgan's position, stated in his examination in
the bankruptcy of Valley Farm and Enterprises Limited,5 had changed
to this extent:
"Q. Have you ever heard of a company called Don Mills?
"Exhibit 3676, p. 97.
318
Chapter VIII
A. I don't believe there is any company by that name, I believe this
Don Mills was Mr. Tramiel and Mr. Kapp in connection with the pur-
chase of some shares of stock of Commodore, and I recall the note, I
think they signed to Aurora. Anyway, Mr. Tramiel can give you that
answer.
Q. I am advised that Mr. Tramiel and Mr. Kapp gave a note to Aurora
for $94,500. and on Aurora's books this is shown as a loan to Don
Mills, and Mr. Tramiel and Mr. Kapp directed that the $94,500. be
paid to Valley Farm.
A. Right."
On the following day, when examined in the bankruptcy of Associated
Canadian Holdings Limited and asked by counsel about the identity of
Don Mills as a borrower from Aurora Leasing of $94,500, he said
bluntly, "This was Mr. Tramiel and Mr. Kapp".6
The evidence of Manfred Kapp in the same matter, taken some
three weeks earlier on October 5, 1965, was in the following vein:7
"Q. Mr. Kapp, the books of account of Evermac indicate that the
shares of Pearlsound Distributors Limited were purchased from N.G.K.
Investments Limited for 17,500 shares of Commodore Business
Machines, and that the 17,500 shares of Commodore Business Machines
were purchased from a company known as Don Mills, and that the
money for this purchase was made to Evermac by Commodore Sales
Acceptance Limited. Can you explain the reason why the transaction
was handled in this manner?
A. I couldn't explain the reason at all.
Q. Who determined the manner in which the shares would be purchased
and the manner by which the shares of Pearlsound Distributors Limited
were paid for?
A. I would assume Mr. Morgan would determine it.
Q. What is the company known as Don Mills?
A. I don't off hand remember.
Q. Did you have any interest in this company?
A. There was a company formed in Georgia which was in short exist-
ence.
Q. What was the name of this company?
A. It was Don Mills or something, I forget.
Q. Did you arrange for the incorporation?
A. No.
'Exhibit 3674, p. 40.
"Exhibit 4156, p. 11.
319
Commodore Business Machines
Q. Did you have any financial interest in that company?
A. No.
Q. Did you own any shares in that company?
A. Not that I know of.
Q. Do you know why this company was incorporated?
A. No.
Q. Do you know when it was incorporated?
A. It was around 1959, 1960. I don't even remember exactly the de-
rials. I just bring this out because I know there was such a company
in existence for a short time."
Tramiel's evidence, given in public to the Commission on November 30,
1966, tells a different story. Mr. Shepherd, in putting to him the trans-
action involving the issue of 250 of the old Commodore Portable Type-
writer shares to Don Mills, proceeded as follows:8
"Q. Who is Don Mills on this particular occasion?
A. Don Mills is Mr. Morgan, Mr. Kapp and myself.
Q. In equal shares?
A. I believe so.
Q. Why did you and Mr. Morgan and Mr. Kapp choose to use this
name in this dealing with the company?
A. Well, it was easier than using the names, three names. We used to
live in Don Mills for many years and we just picked this as a name.
Q. I do not understand in what sense it was easier to use the name, Mr.
Tramiel?
A. Instead of calling it, like, three individuals' names.
Q. Yes.
A. It was easier it seems, and especially for me, to use one name instead
of three names.
Q. Was it intended to deceive anyone?
A. Not as far as I know in any way.
Q. Did Mr. Medland, Mr. Streit and Mr. King know that Don Mills was
simply a name adopted by yourself, Mr. Kapp and Mr. Morgan?
A. Well I have no reason to hide it in any way.
Q. Apart from the reasons did you yourself communicate the knowl-
edge to anyone of those three persons, Messrs. Medland, Streit and King,
of who Don Mills was?
A. I had very little contact with these gentlemen.
"Evidence Volume 84, pp. 11459-61.
320
Chapter VIII
Q. What is the answer to the question, Mr. Tramiel, no you did not
communicate personally this information to them?
A. I don't think so.
Q. Do you have any knowledge of whether Mr. Kapp or Mr. Morgan
communicated this knowledge to them?
A. I don't have the knowledge."
Manfred Kapp was also quite candid about the identity of Don Mills
before the Commission on December 8, 1966."
'Q. What is Don Mills?
A. Don Mills is — was a short-time partnership between Mr. Morgan,
Mr. Tramiel and myself.
Q. Into what transaction did Don Mills engage?
A. Don Mills had acquired 125,000 shares of Commodore Business
Machines from Commodore Business Machines, and borrowed $100,000
to do so.
Q. Was the transaction, it borrowed $100,000 and loaned it to what
was then Commodore Portable Typewriters, and in settlement of the
loan the minutes recorded the issue of 250 shares, which later became,
as you have said, 125,000 shares?
A. That is correct.
Q. What was the reason for using the name 'Don Mills'?
A. The reason we used 'Don Mills', just it was to be simpler than to
use three different names. Mr. Tramiel, myself, happened to be living in
Don Mills at the time, and we used that name. It was strictly Don Mills.
no company and nothing afterwards.
Q. Did Mr. Medland, Mr. Streit and Mr. King know that Don Mills was
simply a name used to represent an equal partnership in respect of these
shares, made by yourself, Mr. Tramiel and Mr. Morgan?
A. As far as I know they knew. I would like to point out that Don
Mills, the address was listed as my own personal home address."
By this time, of course, Mr. Wolfman's evidence, and all the documents
signed by Tramiel and Kapp involving the issue of shares of Commodore
Portable Typewriter to Don Mills, and the purchase from Don Mills of
shares by Evermac Office Equipment, which will be referred to in due
course, had long since become public property. Moreover Morgan was
dead, and it was the insistent and repeated contention of Tramiel and
Kapp that everything they did wras done at his behest or order.
Carman King could not recall, in the evidence he gave to the Com-
mission on December 21, 1966,10 anything about the issue of shares of
•Evidence Volume 88, pp. 12063-4.
,0Evidence Volume 93.
321
Commodore Business Machines
Commodore Portable Typewriter to Don Mills in settlement of any debt,
and said that Tramiel had no reason to say that Streit, Medland or him-
self knew anything about it. He was under the impression that Tramiel
and Kapp controlled the company through their original shares in a
company that they had organized in the United States. He acknowl-
edged, however, that he had signed the minutes which recorded the loan
and the issue of shares. He said, also, that no minutes of directors' meet-
ings were circulated beforehand, and I am inclined to believe his evi-
dence denying any knowledge of the identity of Don Mills. The same
is true of a similar disclaimer by Aubrey Medland, made on December
16, 1966. He said that he had never heard of the name Don Mills until
Mr. Shepherd had mentioned it to him a few days before his appearance
as a witness. At some stage he had realized that Morgan and his wife
were substantial shareholders of Commodore Business Machines, but
said that he was somewhat mystified by this and was never told enough
of the company's affairs. But it will appear that both of these witnesses
had one excellent opportunity to become aware of the commanding
position of Don Mills when the first prospectus was issued, which was
indeed signed by King, if not by Medland.
The Morgan, Tramiel and Kapp Shareholdings on the Eve of
the Public Issue
As a result of the decisions taken on December 15, 1961, and as
may be seen on Table 42, Commodore Portable Typewriter had issued,
since November 5, 1958, 516,000 shares for a total of $236,200 re-
ceived by the company, securing to it an average net price of 46^ $ per
share. The price per share paid by shareholders is illustrated in the
extreme right hand column of Table 42. The 13,000 shares each, held
by Mrs. Tramiel and Mrs. Kapp as a result of the conversion of their
preference shares, appear to have cost them just under 66V^ £ a share if
one gives full credit to the transaction of April 18, 1961. As a result
of a transfer made on May 31, 1962, 100,000 shares of those held in
trust by Morgan were divided into four certificates, giving Tramiel and
Kapp 33,333 shares each, Mrs. Morgan 16,667 and Morgan himself
16,666. Then on June 8 there was another transfer of the balance of
these, being the original 109 old shares, now become 54,500 new shares
and going directly to Tramiel, Kapp and Regina Silberman, Tramiel
and Kapp receiving 18,000 shares each and Mrs. Silberman 18,500.
The cost to Tramiel and Kapp of the 51,833 shares now held by each of
them was $104, or Vs of a cent per share. Mr. Morgan's cost was 1.7^
per share, and her husband held his, like Tramiel and Kapp, for Vs of a
cent. The only other shareholders who had acquired their shares for this
trifling expenditure were David Samuel for 1,500 shares, Carl Solomon
322
Chapter VIII
for 11,500 and Regina Silberman for 18,500, her husband being on the
same footing as Mrs. Tramiel and Mrs. Kapp at almost 66V£^. Mildred
Morgan and Harry Wagman, the latter with 10,000 shares before the
underwriting of June 29, 1962, would have enjoyed the same rate had
they not each bought 100 shares at the issue price of $2.50, a gesture
which raised her average price to 1.7^ and his to 2.7^. The 125,000
shares held by Don Mills cost Kapp, Tramiel and Morgan 15Vi$ per
share. Accordingly, on the eve of the first public issue of the stock of
the company now known as Commodore Business Machines (Canada)
Limited, these three, and members of their families, held 314,599 of the
total of 516,000 shares issued for an aggregate expenditure of $123,411,
or an average price of 39c1 per share.
The Underwriting by Barrett, Goodfellow & Co.
The underwriting of the 300,000 common shares to be offered to
the public at $2.50 per share, in accordance with the terms of the pros-
pectus,1 was undertaken by the Toronto stock-broking firm of Barrett,
Goodfellow & Co., according to its records, on June 29, 1962. The
shares were to be listed on the Canadian Stock Exchange in Montreal,
and application for listing had been made by the Montreal law firm of
Phillips, Bloomfield, Vineberg & Goodman, acting as agents for Solomon,
Singer & Rosen, on May 25. Rennie Arthur Goodfellow, a partner in
Barrett, Goodfellow & Co., who testified before the Commission on June
17, 1966,2 said that he first met Powell Morgan on some unremembered
occasion in 1963. Morgan, he said, had dealt with the firm, and its pre-
decessor, Barrett, Seguin & Co., through its Hamilton office since 1955,
but before 1963 only on a casual basis. Since Goodfellow could not
remember the occasion on which he had first encountered a client of
such evil omen to himself, with whom he subsequently became intimate,
and who for a space put substantial business in his path, it is permissible
to doubt that he did not meet Morgan during the course of the first
Commodore Business Machines underwriting in the previous year.
Goodfellow had been in the securities business since 1926 and with the
Barrett firm since 1934. He gave his evidence with a cool and wary
detachment, no doubt intensified by the imminence of proceedings to be
taken against him by the Toronto Stock Exchange. Information gathered
by Mr. Wolfman from the records of his firm indicates that the 300.000
shares to be offered to the public, out of the 816.000 shares for which
the application for listing had been made, were bought from Commo-
dore Business Machines for $675,000, or a price of $2.25 per share, and
were sold to firms and individuals whose names appear on eight lists.
of which list No. 1 contained particulars of the sale of 277,487 shares,
Exhibit 345.
'Evidence Volume 46.
323
Commodore Business Machines
registered in the name of Barrett, Goodfellow & Co. and sold in the
amounts and for the prices set forth below:3
No. of Price per Total
Shares Share Amount
Dallas Holdings 261,382 2.30 $601,178.60
Annett & Company 5,000 2.35 11,750.00
Valley Farm via W. D. Latimer
&Co 1,000 2.40 2,400.00
Jenkins Evans & Co 2,000 2.40 4,800.00
Butlin Family 400 2.50 1,000.00
J. A. Frame & Co 2,000 2.40 4,800.00
M. Latchman (Annett & Co.) .... 500 2.50 1,250.00
Distribution to Nominees &
others via Barrett, Goodfellow
&Co 5,205 2.50 13,012.50
Dallas Holdings Limited, a company owned in equal shares by Morgan,
Walton and Wagman, thus appropriated 87% of the available shares at
a price of $2.30 per share. Following the well-trod path, Dallas Holdings,
under Morgan's direction, borrowed the $601,178.60 from Aurora Leas-
ing which issued a cheque in this amount to Barrett, Goodfellow & Co.
on June 29, signed for Aurora by Harry Wagman. On the same day
Aurora borrowed $550,000 from Commodore Sales Acceptance, of
which Morgan was the president and over which he exercised complete
control, to defray the cost of this loan.
It is worth while taking a short leap forward chronologically to see
how these shares were disposed of, and on what terms. Here recourse
must be had to the books of Dallas Holdings Limited and Valley Farm
and Enterprises Limited, both being companies belonging to the Trio.
On July 16, 200,000 of these shares were sold to Valley Farm and paid
for by the latter assuming $470,000 of the debt to Aurora. Thereafter
there was a second sale to Valley Farm of 10,000 shares for $23,500,
and another 10,000 shares to C. P. Morgan for the same amount. On
August 20 Valley Farm bought an additional 30,000 shares at $2.35
per share, and on August 27 11,952 shares at the same price. Valley
Farm had thus acquired 251,952 shares at a price of $2.35 per share
for which it paid in part by assuming a total of Dallas Holdings' indebt-
edness to Aurora of $493,500. Dallas made 5^ per share on this trans-
action, and from its books it would appear that Morgan either paid cash
to it for his 10,000 shares or assumed a debt of that company, but
apparently not any part of its debt to Aurora. The shares were not trans-
ferred on the records of Commodore Business Machines immediately
to their ultimate owners, but were registered in the name of Harry Wag-
man in trust. All the proceeds of the issue, or $675,000, were credited
to Commodore Sales Acceptance, thus accounting for the dip in the
•Exhibit 2121.
324
Chapter VIII
graph representing loans by this company, and the credit position of
Commodore Business Machines, in relation to its loans from Commo-
dore Sales Acceptance, on Table 38 in June 1962. Once again the effect
was not one of repayment to the Atlantic companies, but simply of
changing the parties indebted to them.
The Streit Shares and Don Mills
Before returning to the balance of the primary distribution in
accordance with the Barrett, Goodfellow & Co. lists Nos. 2 to 8, further
reference must be made to Table 42 to follow the fortunes of the 70,000
shares owned by C. W. Streit. By an agreement, dated June 14, 1962,
between Streit and Morgan these were sold to the latter for $70,000,
Wagman being the witness to the signature of the parties. The closing
date of this transaction was June 20, and the shares were paid for by a
loan from Aurora Leasing to Don Mills in the amount of $94,500, for
which Don Mills gave a promissory note signed by Jack Tramiel and
Manfred Kapp on that day.1 The cheque from Aurora was signed by
William L. Walton and made payable to Valley Farm, which paid
$70,000 required to close with Streit through the trust account of Solo-
mon, Singer & Rosen. Thus Valley Farm acquired Morgan's right under
the agreement to buy Streit's shares for $70,000, giving Streit a profit of
$25,085, his cost being measured by the amount of his loan of $44,915
for the extinction of which the shares were issued on December 15.
1961. Valley Farm treated the transaction as if it had sold the shares
to Don Mills for $94,500, thus realizing a profit of $24,500. If Streit
was content with a modest profit at this stage when he, as a director and
as a signatory of the prospectus, knew that shares were to be issued to
the public at $2.50, it was no doubt because he also realized that, under
the undertaking to hold shares in escrow contained in paragraph 30
thereof, only 7,000 of his shares could be free in his hands for at least
three months, and that the success of the public issue was by no means
assured. In any event, his resignation as a director of Commodore Busi-
ness Machines is recorded as having been accepted on August 9. 1962.
Here again the registration of the Streit shares was not changed.
and the ultimate destination of 63,000 of them, which would be subject
to escrow, is revealed by the memorandum headed "C. P. Morgan. Win.
L. Walton and H. Wagman — Statement of Investments as at August 31,
1962",2 already referred to. The second item on the list, shown under
the heading "shares in public companies", is "63.000 shares Commodore
Business Machines Inc. @ $4 for $250,000"'. the 'inc." being as
obvious an error as the value per share is an obvious anticipation. The
number of 63,000 shares is exactly what would be required out of
70,000 shares to comply with the provisions of an escrow agreement
which will be considered below. The working papers of Walton. Waeman
'Exhibit 2151.
'Tabla 30.
325
Commodore Business Machines
& Co.3 show the 63,000 escrowed shares as pledged with Aurora
Leasing against the loan to Don Mills, on a sheet entitled "Working
Sheet re Trio Account Holdings". In the end Tramiel and Kapp got
13,333 of these shares each, through Associated Canadian Holdings pay-
ing $29,200 to Aurora and charging $14,600 each to Tramiel and
Kapp. Further evidence of the disposition of these shares is provided
by the cheque book of account No. 13324 in the Guaranty Trust Co.
of Canada — the Trio account of Walton and Wagman4 — which con-
tains a stub, dated March 26, 1963, recording a payment of $157.50 to
the Eastern Trust Company for Ontario transfer tax on 63,000 escrowed
shares of Commodore Business Machines. On June 20, 1962 Carl
Solomon wrote on behalf of his firm to Walton, Wagman & Co.,5 report-
ing on the purchase by C. Powell Morgan from C. William Streit of
70,000 shares of Commodore Business Machines, reciting Streit's attend-
ance at his office, the delivery of two certificates for 140 of the old
shares, together with a promissory note to him, dated July 4, 1960, for
payment of $50,000 in U.S. funds and his resignation as a director of
the company to take effect upon acceptance by the board. He concludes
by asking for a cheque in the amount of $70,000. The original escrow
agreement referred to was found in a file of Solomon, Singer & Rosen,6
is dated June 1962, the day of execution having been omitted; the
parties executing it were J. Aubrey Medland, Helen Tramiel, Estelle
Kapp, Benjamin Silberman, Don Mills per Manfred Kapp, Mildred
Morgan, Jack Tramiel, Manfred Kapp personally, Harry Wagman,
C. William Streit, Carman G. King, Carl M. Solomon, C. Powell Mor-
gan and the Eastern Trust Company. David Samuel is shown as a party
of the first part, but apparently omitted execution of the agreement.
It provides for the lodging of 90% of the shares owned by the parties
of the first part in escrow with the Eastern Trust Company, in the
total amount of 464,400 shares, and their release by the latter as escrow
agent, pro rata to the parties entitled thereto, of one-third six months
from the date of acceptance of the prospectus by the Ontario and
Quebec Securities Commission, whichever is later, one-third after nine
months and the remainder after twelve months, and prohibits any sales
of escrowed shares in the interim, other than between the parties, or to
such officers or employees of Commodore Business Machines as shall
become parties as a result.
Evidence of Distribution for the Canadian Stock Exchange
In the meantime the process of listing the stock of Commodore
Business Machines for trading on the Canadian Stock Exchange had
reached the point where Phillips, Bloomfield & Co. had been advised,1
'Exhibit 1700.
4Exhibit 806.
"Part Exhibit 1705.
•Exhibit 880.1.
1Exhibit 2153.
326
Chapter VIII
on June 12, that the Exchange's listing committee had accepted the
application "subject to evidence of satisfactory distribution and full list-
ing application". On July 26 Solomon, Singer & Rosen wrote to the
exchange,2 enclosing the application to list 816,000 common shares and
asserting that as at July 1 3 there were 295 shareholders. Since immedi-
ately prior to the public issue of June 29 there had only been 16 share-
holders, this transformation requires examination. On July 9 Barrett,
Goodfellow & Co. despatched its eight lists of names of persons, for
whom the registration of 300,000 shares was required, in the amounts
set opposite each, to the Eastern Trust Company as transfer agent,3 ask-
ing for notification of the time at which the certificates might be picked
up, and expressing particular interest in the first one, specifying the cer-
tificates and denominations required to be registered in the name of
Barrett, Goodfellow & Co. for a total of 277,487 shares. List No. 4
and List No. 8 contain the names of 54 persons for whom 100 shares
each are sought. List No. 5 contains 13 names, 1 1 of which require 100
shares each, including Campbell Morgan, Mildred Morgan, Andrew M.
Suggett and W. L. Suggett, all at 1 1 St. Ives Crescent, Toronto, which
was C. P. Morgan's address; the only exceptions to the 100 share allot-
ment are that of 1,000 shares for Mrs. Ann P. Gregory and 1,000 shares
for Mr. Wilfrid P. Gregory of Stratford. British Mortgage & Trust Com-
pany appears on List No. 6 as requiring 10,000 shares. Also in the
Barrett, Goodfellow & Co. underwriting file4 is a receipt of William L.
Walton, crediting him with $12,500 received by cheque, with the nota-
tion, "See Attached List", immediately adjacent to which is a typed list
of names which turns out, on examination, to contain the same 50 names
as Barrett, Goodfellow & Co.'s List No. 8. Stapled to this is a note
which reads "5,000 shares 50 x 100 paid June 28th Wm. L. Walton
Guaranty Trust Company account 13324 for $12,500". This reference
to the Trio account coincides, except as to date, with a cheque stub for
that account5 dated, obviously in error, June 29, 1961, and saying, "In
favour of Barrett, Goodfellow 5,000 C.B.M. @ $2.50 — $12,500
W.L.W. List". Then there is a copy of a letter addressed to William L.
Walton and dated July 12, 1962, reading as follows:6
"Dear Bill:
We are enclosing fifty power of attorney covering a total of 5,000
shares of Commodore Business Machines (Canada) Limited. We are
holding the relative certificates in this office subject to your direction.
Yours very truly,
Barrett, Goodfellow & Company,
A. A. Amos"
'Exhibit 2154.
'Exhibit 2121.3.
'Exhibit 2121.
'Exhibit 806.
'Exhibit 2121.2.
327
Commodore Business Machines
Finally the list reappears as annexed to a receipt for securities, signed by
Harry Wagman, on delivery slips of Barrett, Goodfellow & Co. on August
30, and the records of Commodore Business Machines disclose that 35
of the 50 certificates for 100 shares, issued in accordance with this list,
were transferred on December 31, 1964 to Associated Canadian Hold-
ings, all 50 certificates having executed powers of attorney attached and
cancelled.7
Evidence of Jeffreys, Knowles and Spanton
The curiosity of the Commission's investigators was aroused by the
appearance in the Barrett, Goodfellow file of two letters, the first1
addressed to Mr. E. A. Jeffreys, of R.R. 3, Orangeville, and the second2
to Mr. Wm. Knowles of 9 Fairbourne Crescent, Toronto, both being
original letters from Barrett, Goodfellow & Co., signed by A. A. Amos,
in the following terms:
"We are enclosing a copy of the prospectus of Commodore Business
Machines (Canada) Limited dated May 31st, 1962.
We take this opportunity of thanking you for your valued order. Our
confirmation of your purchase will be mailed to you under separate
cover."
At the foot of that sent to Jeffreys was the handwritten note, "Opened in
error — No knowledge of this", and the one addressed to Knowles had
been marked, "Wrong Address", and stamped by the Post Office, "Re-
turn to sender — unknown". Messrs Jeffreys and Knowles were accord-
ingly interviewed and in due course appeared before the Commission
with Herbert J. Spanton, formerly secretary to C. P. Morgan, on May 26,
1966.3 Certificate 0253 for 100 common shares of Commodore Busi-
ness Machines, issued in the name of E. A. Jeffreys, with power of attor-
ney purportedly signed by the holder and the signature witnessed by
W. L. Walton, was put to the witness Jeffreys who denied on oath that
it was his signature, but recognized that of Walton. He said further that
he had never discussed with anyone the possibility of subscribing to the
initial underwriting of these shares. The witness Knowles, who was an
accountant with Walton, Wagman & Co. at the material time, had the
same to say about certificate 256 issued in his name with the same
endorsements. Herbert J. Spanton, testifying as to two certificates each
for 100 shares, one issued in his name and the other in that of his wife,
swore that the signature "H. J. Spanton" appearing on the power of
attorney to transfer the shares was not his, and offered a specimen of his
wife's handwriting in evidence4 to prove to my satisfaction that the
7Exhibit2156.
Exhibit 2121.4.
"Exhibit 2121.5.
'Evidence Volume 38.
'Exhibit 2249.
328
Chapter VIII
same was true of the signature appearing to be hers. The witness to
these signatures was, in each case, W. L. Walton. Much later, when
Walton himself gave evidence,'"' he said that if Spanton did not attend
before him, some one had assured him that the signature "H. J. Spanton"
was genuine, and acknowledged that it was a possibility that he had wit-
nessed this signature in Spanton's absence. He acknowledged further
that he had never met Mrs. Spanton, but that "somebody else" had told
him that she had signed the power of attorney. He could not recall the
name of this informant, but did recall Morgan asking him for a list of
names of people whom he wanted to act as shareholders of Commodore
Business Machines. The reason for this escaped him. He maintained
that he had got the consent of all the people whose names he had listed
to "lend their names", but did not think that any of them ever had bene-
ficial ownership of the shares; the signatures of "W. L. Walton" as wit-
ness he admitted in each case to be his own.
The Services of Irwin Singer
Between June 29 and July 14 an additional 153 shareholders appear
on the company's lists. Certificates Nos. 22 to 33 inclusive comprise
the 7,000 shares in the Streit block, free from escrow. On July 1 1 Irwin
Singer wrote to the Eastern Trust Company, to the attention of J. K.
Breakey, in the following terms:1
"Re: Commodore Business Machines
(Canada) Limited
Dear Keith:
We enclose herewith a list of names and addresses beside which are
the number of shares to be transferred into the names of the following
persons. We also enclose herewith 'Street Certificates' in the same
amount.
To facilitate our listing on The Canadian Stock Exchange, we would
appreciate it if you would record such transfers and issue new share
certificates as quickly as possible.
When the new share certificates are completed I will take delivery of
the same for the respective shareholders.
We also enclose herewith share certificates Number 22 to Number 33,
totalling 7,000 shares, for all of which share certificates have been duly
endorsed in blank for transfer."
The list consists of 55 names, with appropriate addresses and the num-
ber of shares to be transferred set opposite. Most were lots of 100 shares.
except in the cases of Arlene Joyce Goldhar, Murray Poizner, Julius Poiz-
ner, Bernard and Charlotte Awerbuck, Albert Goldhar. Arthur Irvine,
BEvidence Volume 8 1 .
'Exhibit 880.2.
329
Commodore Business Machines
Harvey Wagman, Sylvia Wasylyshem, Barbara Wagman and Goldie
Wagman, who were to be issued 200 shares each, and Harry L. and Ethel
Solomon who were to get 300 each. Two days later Singer, again writing
for his firm, reported to Harry Wagman,2 referring to the fact that certifi-
cates numbers 22 to 33, representing 7,000 shares registered in the name
of "William C. Streit", had been "handed to us for transfer", and set out
the same names with the appropriate share certificate numbers, and the
numbers of shares contained in each of two groups, one totalling 4,300
shares and the other 2,700 shares. He enclosed, according to his letter,
certificates numbers 382 to 403 inclusive, representing the 2,700 shares
and said, "we would ask that you have the registered owners endorse
their respective share certificates in blank". After pointing out that it
would be necessary to have the signatures thus obtained guaranteed by
a bank, he concluded: "We will similarly have the shares as set out in
column (a) above endorsed in blank by the respective registered own-
ers and arrange to forward them as per our instructions." A copy of this
letter is indicated as going to C. P. Morgan. Singer wrote again on July
18, also to the attention of Harry Wagman and also with a copy for
Morgan, in the following terms:3
"Further to our letter of July 13th, last, we have now had the oppor-
tunity of having certificates, representing 4,300 shares in the capital
stock of the above-noted Company, 'signed off' and accordingly, hand
them to you together with share certificates representing 2,700 shares,
as set out in the letter dated July 13th, 1962.
We also turn over to you, Share Certificates Number 417, through to
426, inclusive, representing 1,000 shares in the capital stock of the
Company. These certificates were transferred from C. P. Morgan to ten
people, whose names, were supplied to us by Mr. John Shemilt. We
presume that you will arrange through Mr. Shemilt to have these certifi-
cates 'signed off'.
Would you be kind enough to execute the attached acknowledgement
of Share Certificates representing a total of 8,000 Common Shares in
the capital stock of the Company."
Evidence of Edward L. Stone
One of the names which appeared on the list representing 4,300
shares, for which Singer made his firm responsible in the process of get-
ting the transferees to "sign off", was that of Edward Lawrence Stone.
His address on the list sent to the Eastern Trust Company was given as
500 University Avenue, Toronto, and he was said to require the issue of
100 shares. Mr. Stone is a solicitor of the Supreme Court of Ontario
practising in Toronto, and gave his evidence to the Commission on
"Exhibit 880.3.
•Exhibit 880.4.
330
Chapter VIII
March 20, 1967.1 He was a friend of Singer, and the reluctance with
which he said what he had to say emerges from the transcript.
"Q. Mr. Stone, your full name, sir?
A. Edward Lawrence Stone.
Q. Mr. Stone, from Exhibit No. 2156, I am producing to you, sir, the
original of a share certificate number 0379, of Commodore Business
Machines (Canada) Limited. Share evidencing ownership of 100 common
shares of Commodore Business Machines (Canada) Limited dated July
12, 1962. Mr. Stone, on the reverse side of this certificate there is a
signature in ink, 'Edward Lawrence Stone'.
Is this signature in your handwriting, sir?
A. No, it is not.
Q. Mr. Stone, were you ever the owner of 100 common shares of
Commodore Business Machines (Canada) Limited?
A. I can't recall being the owner of the 100 shares represented by this
certificate, sir.
Q. Do you have any idea, sir, how your purported signature comes to
appear on this particular certificate?
A. At this time, I don't know.
Q. Did you ever, at any time, have any dealings of any nature whatso-
ever, that might have led to an acquisition by you of a hundred shares
of Commodore as evidenced by this certificate?
A. I can't specifically recall any such dealings.
Q. Well, just to be fair . . . ?
A. I might say, that the first time I actually saw the certificate was when
a Mr. Angus of your office, presented it to me on Friday afternoon, the
actual certificate itself. I then wrote out my signature.
Q. Perhaps I will deal with your signature.
I am producing to you, sir, a small slip of paper tacked on to a
blank sheet on the slip of paper is the inscription 'Edward Lawrence
Stone'. Is this your signature and in your handwriting, sir?
A. Yes.
MR. CARTWRIGHT: Thank you. I ask that this signature specimen
as identified, be entered and marked as an exhibit.
THE COMMISSIONER: Exhibit 4209.
— EXHIBIT 4209: Slip of paper with the inscription 'Edward Lawrence
Stone'.
MR. CARTWRIGHT: With reference to the share certificate, sir,
before you, I see that it is guaranteed as to signature by Irwin Singer
and witnessed by Irwin Singer. Would that assist your memory, sir, as
to anything generally you might know about this?
lEvidence Volume 106, pp. 14363-6.
331
Commodore Business Machines
A. As I say, at this time, at this particular time I can't recall anything.
As I say, the first I saw of it was last Friday and I can't recall anything
at this moment.
THE COMMISSIONER: Well, you think you will be able to recall
anything at a later period and if so, why?
A. My lord, it is possible. I don't really know the circumstances, the
particular circumstances that surround this certificate. As I say, the
first that I saw of it was last Friday. I do know Mr. Singer, and I have
known him for some time. As a matter of fact, we were in college
together, but I don't know the — at this particular time I recall really
can't recall anything that might concretely give us any information as to
the certificate. Except that the signature is not mine.
Q. And just for the record, Mr. Stone, I don't think that counsel has
asked you — what is your business?
A. Solicitor.
Q. Here in Toronto?
A. (no audible answer) .
THE COMMISSIONER: The witness nods assent to that.
THE WITNESS: Yes.
MR. CARTWRIGHT: Well, just so I won't leave anything uncovered,
sir, is there anything at all that might assist me as to how your purported
signature turned up on the reverse side of this certificate?
A. No."
Evidence of Irwin Singer
Irwin Singer was thereupon recalled to the stand and examined at length
by Mr. Cartwright as to his reasons for witnessing and guaranteeing
what was clearly not the signature of Stone, and as to all the other
signatures which were treated by him in the same manner. With respect
to the Stone signature he must be allowed to speak for himself, and in
full.1
'TRWIN SINGER, recalled:
THE COMMISSIONER: Mr. Pomerant, you are with Mr. Singer?
MR. POMERANT: Mr. Commissioner, I take it that the protection
earlier sought as regards to the Canada Evidence Act still applies?
THE COMMISSIONER: Yes, very well.
EXAMINED BY MR. CARTWRIGHT:
Q. Mr. Singer, please, would you look at part of Exhibit No. 2156. The
part I am referring to is the certificate number 0379.
"Evidence Volume 106, pp. 14367-74.
332
Chapter VIII
THE COMMISSIONER: Perhaps before you do that, I forgot to
remind Mr. Singer that he is still under oath, having testified before. Is
that clear?
A. Yes.
THE COMMISSIONER: Yes.
MR. CARTWRIGHT: Mr. Singer, would you look at the reverse
side of the certificate please. I believe you have just heard the evidence
of Mr. Stone as to the authenticity of the purported signature of Edward
Lawrence Stone.
Did you hear his evidence, sir?
A. Yes, I did.
Q. Sir, does your signature appear here as a witness and also did you
inscribe beneath the purported signature of Mr. Stone in brackets,
'signature guaranteed by Irwin Singer'?
A. I did.
Q. Would you explain, sir, the signature of Edward Lawrence Stone on
this document?
A. I can only guess. I can't recall specifically. There were a number of
share certificates of Commodore Business Machines (Canada) Limited
that were registered in the names of either personal friends or relatives
of myself and my partner.
These share certificates we came to learn, were not owned by these
individuals. Mr. C. P. Morgan, I believe, requested that we have the
share certificates signed off and put into street form by these individuals
in most instances. We contacted these individuals and had them in fact
sign them off. In some instances when we talked to these people and
requested that the share certificates be endorsed by them, they said
either to me or to my partner, 'Well, you go ahead and sign it off. Sign
my name, it is all right. I don't own the share certificate in any event.'
I would guess that this was the circumstances with respect to the
signature of Mr. Stone on this share certificate were exactly that. That
is permission to — for myself or my partner — to sign his name on the
share certificate was obtained and the signature written on the back of
the share certificate. The purpose of the guarantee by myself on the
share certificate, was at the request of the transfer agent. He would
accept my guarantee of the signature as guaranteeing that in fact the
share certificate w:as in properly in street form for transfer and he would
have the share certificate transferred.
Q. Did you write 'Edward Lawrence Stone' on this document?
A. I don't think so. This doesn't look like my handwriting.
Q. Who did?
A. Well, it would either be myself or my partner. Mr. Solomon.
Q. Mr. Carl Solomon?
A. That is right.
333
Commodore Business Machines
THE COMMISSIONER: I appreciate the fact that you said Mr.
Singer that this was a guess, but in view of what Mr. Stone has said,
certainly it can't be a very helpful guess in his particular situation, be-
cause he didn't tell us that he talked to you on the telephone and said,
'Go ahead, sign my signature' or anything of that kind.
Is there anything concrete you can remember about this?
A. Not this specific nature, Mr. Commissioner. The friends and rela-
tives in whose names share certificates of Commodore Business Machines
(Canada) Limited were issued — that was my friends, my relatives and
those of my partner, Mr. Solomon, I know specifically each and every
one was contacted and in each instance either their signature was
obtained or their permission for the endorsement was obtained. Now, I
can't recall the specific conversation with Mr. Stone. Whether I tele-
phoned Mr. Stone, or whether Mr. Solomon telephoned Mr. Stone.
Q. Well, that is my difficulty, because Mr. Stone has said that he recalls
nothing about it and certainly I would expect him to recall having
talked to either yourself or Mr. Solomon on the telephone and said,
'You can sign this. Because it really isn't mine'. That is my problem.
A. I can't explain that, sir.
MR. CARTWRIGHT: Mr. Singer, in view of the fact that this was
done in this manner, did you not write a letter of confirmation to Mr.
Stone, confirming that this had been done? Wouldn't that be the normal
course for a solicitor to do something like this?
A. No, sir. Mr. Stone was the registered holder of the share certificate,
but he had no beneficial ownership in it. His name was obviously being
used as a nominee shareholder. There was no legal transaction as such
involved in this matter. I wasn't acting on behalf of Mr. Stone. His
permission, I believe, had been granted to the endorsement and the
endorsement is made.
THE COMMISSIONER: Can you tell me why a number of your
friends and Mr. Solomon's friends were assembled to have Commodore
Business Machines certificates issued in their name. Was this done at
somebody's request to you and Mr. Solomon?
A. Yes.
Q. For what purpose?
A. This happened a long time ago, almost five years ago, and I have
been giving it some thought, and to the best of my recollection, what
occurred was, at the time of the initial public offering of shares of
Commodore Business Machines, the offering was the best efforts offer-
ing. There is no underwriter and an effort was being made through the
Barrett Goodfellow firm and through the officers and directors and
principal shareholders of Commodore Business Machines to sell its
shares to the public at large. I believe that myself and Mr. Solomon
among other people, and I think there were quite a number of other
people, were approached by Mr. Morgan and requested to furnish names
of potential purchasers of Commodore Business Machines. I told in
334
Chapter VIII
reply to this question — I told them that the only people that I knew
who might be interested were my friends and my relatives and primarily
only because we were the solicitors for the company.
We had great faith in the company. I was requested to furnish a list
of these names, I did. I believe Mr. Solomon, did also. We discovered
at a later time — now I am not sure whether it was days, weeks or
months, that in fact shares had been issued in the names of these people.
Now, this was not done with our consent, but it had been done. We
were then requested to have these share certificates signed off by these
people and that is how it came about.
Q. Let me see if I can refresh your memory a little. We have heard
evidence that the purpose for getting shares into the hands or apparently
into the hands of individuals, was to give or to satisfy the Canadian
Stock Exchange's requirements before making a public listing. That
they should be distributed sufficiently to the public to comply with the
rules of the Exchange.
Now does that help you to explain why these names were asked for
and furnished?
A. Well, I think sir, that that is probably why the shares were registered
in these peoples' names, but this was not the reason given to me at the
time that the list of names was furnished.
Q. I see.
A. But, as I recall it, the reason that I was requested and Mr. Solomon
was requested to furnish names was for the purpose of furnishing poten-
tial purchasers of shares of Commodore Business Machines, and the
names were furnished on that basis. The ultimate issue of the share
certificate in their name came as a great surprise to both Mr. Solomon
and myself when we discovered it, and it was discovered at the time
that the share certificates were presented to us with the request that we
have them signed off.
Q. Mr. Singer, I must tell you that it comes as a great surprise to me
that a solicitor should witness a signature and go even further, guarantee
a signature, which the signatory says is not his, and I want to give you
every opportunity to explain it, but do you take the position if this
signature is not Mr. Stone's, as he says on oath it is not, and since he
says that he was not aware of having owned any Commodore Business
Machines stock that it was the proper thing for you to do, or even an
effective thing for you to do, to witness his signature as having been
signed and then guarantee it.
I should explain I want to be fully in possession of your views before
I draw any conclusions about it.
A. Well, I am afraid that I can add nothing to what I have said. The
position that I take on the matter is that it was done with his full knowl-
edge and concurrence and it was done as a — it was not signed by him
only, because it was probably inconvenient at the time to attend upon
him or have him attend upon us for the purpose of signing that, the
signature — it was not his signature — in fact, exhibited his intent and
335
Commodore Business Machines
under those circumstances the — my signature on it is nothing further
than the fulfilment of the condition of the transfer agent that the share
certificates would be transferred to the proper owner."
There were further questions directed by both Mr. Cartwright and me to
the witness on this subject, and concerning other names and signatures
which had been used in the same manner as that of Stone, but the above
quotation constitutes a fair sample of Singer's views as to the actions of
himself and his partner Carl Solomon on this occasion. Anyone reading
it, together with the letters written to the transfer agent and to Harry
Wagman, can hardly be in any doubt as to the disingenuousness of his
explanation or the impropriety of his actions. The effect of what he did
was particularly within his knowledge as a practising lawyer, and cannot
be excused.
Evidence of John R. Shcmilt
When Singer made his final report to Wagman in this matter on
July 18, it will be recalled that he also enclosed Commodore Business
Machines share certificates Nos. 417 to 426 inclusive, representing 1,000
shares transferred from C. P. Morgan to ten people whose names had
been supplied by John Schemilt.1 This reference was, no doubt, to a let-
ter dated July 10,2 on the notepaper of Netherlands Overseas Corpora-
tion Canada Limited at 197 Bay Street in Toronto, addressed to Carl
Solomon, and reading:
"Dear Carl:
Powell mentioned you might need a few extra names for the Com-
modore Business Machines fisting.
Yours very truly,
John' "
Attached to the letter was a typewritten list of names of ten people
with their addresses as follows:
"Miss W. Bakkenes, Miss Shirley Robertson,
193 Norton Avenue, 1596 Bathurst Street, Apt. 3B,
Willowdale, Ontario. Toronto, Ontario.
Miss Carol Davidson, Mr. Charles Montgomery,
17 Leggett Avenue, 188 Olive Avenue,
Weston, Ontario. Willowdale, Ontario.
Mr. Edward Lee, Mr. Robert A. White,
45 Glen Road, Apt. 205, 31 Alexander Street, Apt. 610,
Toronto, Ontario. Toronto, Ontario.
'Exhibit 880.4.
•Exhibit 2157.
336
Chapter VIII
Mrs. Gerry Shemilt, Mr. Jan Duinker,
74 Brooke Avenue, 266 Donnell Drive,
Toronto, Ontario. Port Credit, Ontario.
Miss Renee Fine, Mr. John Shemilt,
45 Elm Street, 197 Bay Street,
Toronto, Ontario. Toronto, Ontario."
Shemilt had been examined on this matter almost a year before Stone
and Singer, on May 26, 1966. Mr. Cartwright put the letter to Solomon
to him and he said that some of the names were those of employees of
Netherlands Overseas Corporation and some were those of friends of
his.8
"Q. Yes. Did you consult with each person that appears on this list,
that is, on page 2 of Exhibit 2157, and ask them if they wished to
subscribe to the common shares of Commodore Business Machines
(Canada) Limited?
A. I did not ask them if they would care to subscribe to the shares of
Commodore Business Machines.
Q. Why did you put their names on this list, then?
THE COMMISSIONER: Well, what did you ask them?
A. As I recall, Mr. Morgan phoned me and said that he was interested
in a company Commodore Business Machines, which I had never heard
of particularly, that was being turned from a private company into a
public company and that they had received approval to list the shares on
the Canadian Stock Exchange, and he wondered — I can't remember
how he worded it to me, but he wondered whether I had any people
who might be interested in acting as a nominee for him. He assured
me that they had sufficient names to meet the requirements of the
Exchange but felt that they might like, for appearances' sake, to have as
long a list as possible.
Q. So then what did you do?
A. I associated these various people and asked them if they in turn
would do a favour for me, because I felt I was doing a favour for Mr.
Morgan.
Q. What did you ask them to do?
A. I asked them if — I'm not sure how I worded it, but in effect if they
would be willing to act as a nominee.
MR. CARTWRIGHT: Yes. And why did you send this letter to Mr.
Solomon, what did he have to do with this?
A. It must have been that Mr. Morgan said if I have any nominees to
send them to Mr. Solomon.
Q. And these people were quite content to be a nominee?
A. As far as I remember they were.
'Evidence Volume 38, pp. 5261-7.
337
Commodore Business Machines
Q. No one objected?
A. Not that I can remember.
Q. What did you explain to them that this was going to entail or involve
on their part?
A. I don't remember what I explained, except I am sure I would say
to them it isn't really involving anything very much on their part.
Q. Mr. Shemilt, I assume that no one paid any money, none of those
people paid any money for those shares?
A. I would assume so. In fact, I wasn't even sure the list was going to
be used at the time.
Q. Out of Exhibit 2156 I am producing to you a share certificate in
this company, number 426, for 100 common shares, and power of
attorney on the back, is this your signature here on the power of
attorney?
A. That is my signature.
Q. And Mr. Wagman as witness, H. Wagman.
A. Yes.
Q. Did you sign this off in his presence, sir?
A. I don't remember when I signed it off. I would assume it was in
Wagman's presence.
Q. Also out of the same exhibit I show you certificate number 425, for
100 common shares, Mr. John Duinker. He is an executive, sir, of
Netherlands Overseas?
A. That is right.
THE COMMISSIONER: He is the president, isn't he?
A. That is right, sir.
MR. CARTWRIGHT: Do you recognize that power of attorney of
transfer, Mr. Duinker's signature there?
A. That appears to me to be Mr. Duinker's signature.
Q. I see. Did he ever discuss this with you subsequently to July 12th,
1962, that he held a hundred shares?
A. Not until the last day or two when there was mention made in the
newspaper.
Q. I see. And who were the people all going to be nominees for?
A. It was Mr. Morgan who asked me, so I assume it was for Mr.
Morgan.
Q. Mr. Morgan. And your wife's name, sir? Are you married, sir?
A. Yes.
Q. And your wife's name?
A. Gerry.
338
Chapter VIII
Q. Mrs. Gerry Shemilt is your wife, sir?
A. Yes.
Q. And on the back page of certificate 420. the power of attorney form,
the lower right hand coiner. 'Mrs. Gerry Shemilt". is that your wife's
signature, sir?
A. That appears to be.
Q. Are you sure?
A. I can't be sure. It appears to be.
Q. Did she sign her name ordinarily Mrs. Gerry Shemilt whenever she
signs a signature?
A. I believe the practice when signing a share certificate, you sign it
exactly on the back as it appears on the front.
Q. You cannot say for sure whether this is your wife's signature?
THE COMMISSIONER: Let us put it a little more precisely. Is that
your wife's writing?
A. It appears to be. sir, yes."
On re-reading this transcript many months later, I was impressed by the
repetition of the words, "It appears to be", even after the intervention
by myself, and concluded that counsel and I had been too easily satisfied
with the answers dealing with Mrs. Shemilt's certificate. In consequence
two of the Commission's investigators attended upon Mrs. Shemilt on
September 22, 1967, and were told by her that she knew nothing about
the certificate. At the same time she furnished them with a sample of
her own handwriting which, on examination by the experts of the Centre
of Forensic Sciences, proved not to be the handwriting of the person who
had signed the power of attorney on Certificate No. 426. This report
led to a number of examinations of the persons on Shemilt's list under
the Securities Act by Mr. Cartwright, and by Mr. Gillman of the Ontario
Securities Commission. Those examined were Carol Holt (nee David-
son), Jan Duinker, Robert A. White. Charles Montgomery. Edward
Lee, Wilhelmina Bakkenes, Renee Fine, John R. Shemilt and Shirley
Robertson.4 Other than Shemilt himself, they all maintained on oath
that it was not until they were asked to execute powers of attorney that
they were told of the use of their names as shareholders of Commodore
Business Machines. They had been content to do this as a favour to
Shemilt who in each case was present when their signatures were affixed.
In no case, however, does Shemilt's name appear as a witness, six of the
signatures being ostensibly witnessed by Manfred Kapp. two by Harry
Wagman and two by W. L. Walton, none of whom were in fact present.
Mrs. Shemilt was not examined because of her delicate health.
'Exhibits 5090-5, 5097 and 5099-5100.
339
Commodore Business Machines
It will be remembered that Shemilt was not only the owner and
operator of Old Angelo's Restaurant, indebted to Morgan and Morgan's
companies, but also the general manager of a company engaged in the
securities business and a wholly-owned subsidiary of the Netherlands
Overseas Bank in Amsterdam. The handling of share certificates, and
the effect of mishandling them, are as peculiarly within his knowledge as
in the case of Irwin Singer. Both engaged in pursuits where expert knowl-
edge and a high degree of responsibility must be assumed by the public
and ensured by the regulatory authorities. In the case of Shemilt it is
for the Ontario Securities Commission, as it is for the Law Society of
Upper Canada in the case of Singer, to say the final word within the
limits of their jurisdiction, and for the law officers to consider the possi-
bility of perjury having been committed.
Information Required by and Given to the Canadian Stock Exchange
There is no record in the books of Commodore Business Machines
that any of the purported owners of these 7,000 shares of the Streit
block which were issued in their names by the Eastern Trust ever paid
any money for them, and 2,900 shares were dealt with again when they
were transferred on December 31, 1964 to Associated Canadian Hold-
ings, a company owned by Morgan, Tramiel and Kapp and their
families; a further 2,100 shares were eventually lodged with the Mercan-
tile Bank as collateral to a loan to that company on May 17, 1965. The
registrations and transfers of shares between July 10, 1962, the date on
which the Eastern Trust issued 300,000 shares in accordance with the
eight fists submitted by Barrett, Goodfellow & Co., and July 13 the date
of the application to the Canadian Stock Exchange to list 816,000
shares in which the shareholders were said to be 295 in number, may be
found at Table 43. 1 It shows that the 300,000 shares to be offered to
the public appeared to be in the hands of 1 12 shareholders, 50 of which
are recorded in W. L. Walton's list No. 8, for whose shares Walton paid
$12,500 to Barrett, Goodfellow & Co. out of the Trio account, and
in its lateral extension the incidence of the number of shareholders and
the shares held, in categories, beginning with holdings of one to 100
shares and ending with 1,000 shares and over. Of the 112 reputed
shareholders 97 of them appear as holding 8,013 shares in denomina-
tions of 100 or less; nine individuals held 1,700 shares in denominations
between 101 and 200; two held 800 shares in denominations between
301 and 400; Mr. and Mrs. W. P. Gregory held 1 ,000 shares each; and, in
the classification of 1,000 shares and over, British Mortgage & Trust Com-
pany held 10,000 and Barrett, Goodfellow & Co. 277,487 shares, for
sale in a manner already described, but principally to Dallas Holdings
Limited. The trades subsequent to initial distribution are illustrated
below the reference to 516,000 shares held by promoters, either free or
Exhibit 2158.
340
Chapter VIII
in escrow, and the sources of request for registration are identified where
possible. By July 13, when the total of 295 shareholders of 816,000
shares was reported, 239 apparently held 19,139 shares in amounts of
100 or less; 28 held 5,310 in amounts between 101 and 200, two held
600 in amounts between 201 and 300; three held 1,200 in denomina-
tions of 400 shares each; three held 1,500 in denominations between
401 and 500 shares; three held 3,000 shares in denominations of 1,000,
and only 17 held 785,251 in amounts of over 1,000 shares. The infor-
mation thus set forth is substantially in agreement with the analysis of
shareholdings contained in the listing statement forwarded in Singer's
letter of July 26 to the Canadian Stock Exchange,2 which supplied the
items of information required by it before final approval of the appli-
cation. In this letter the company's solicitors also say that the five largest
shareholders are Don Mills with 125,000, J. Aubrey Medland with
72,500, Carman G. King with 35,000, Manfred Kapp with 33,833 and
Jack Tramiel with 33,833 shares (a total of 300,166); that, of the
816,000 issued shares, 464,000 are held in escrow, 287,666 are in the
hands of the promoters, officers and directors of the company and their
agents or trustees; that, therefore, the percentage of shares in the hands
of the public is 64.75%. This extraordinary calculation is illustrated
by the fraction "^§5 x 100", which is mathematically correct but
otherwise unintelligible. It is remarkable that it did not appear to be so
to the officer of the exchange who received and, presumably, perused the
letter.
The attitude and requirements of the Canadian Stock Exchange
in the middle of 1962 were the subject of evidence given by Giovanni
Giarrusso on May 26, 1966.3 At the time he gave it he was manager of
the respective listing departments of the Canadian Stock Exchange and
the Montreal Stock Exchange which are apparently operated in conjunc-
tion, but unfortunately he was not so employed, and was not indeed an
employee of the exchanges in July of 1962. Their rules with respect to
listing were first published at the beginning of 1963,4 but before then
listing requirements were in the discretion of the Board of Management
which considered each case separately. Giarrusso said that the practice
followed by the Board was substantially the same as what is now re-
quired, except that in 1962 the general rule was that at least 20% of
the issued and outstanding shares were to be held by the public, ex-
clusive of officers, directors, promoters or their agents or trustees. There
was an additional requirement that there should be at least 100 share-
holders, each holding one board lot or more of a company's stock. In
1963 the requirement changed so that the minimum percentage of
shares to be held by the public became 25% and the minimum number
•Exhibit 2264.
'Evidence Volume 38.
'Exhibit 2257.
341
Commodore Business Machines
of shareholders 150. These prerequisites to listing were insisted upon,
according to this witness, in order to establish public need and to ensure
the maintenance of a free and orderly market at a price which would
reflect the judgment of a large number of shareholders, as well as poten-
tial investors.
If the common stock of Commodore Business Machines was called
for trading on July 23, 1962, as Giarrusso testified, it is difficult to
understand why this should have been done three days before the date
of the letter from Solomon, Singer & Rosen5 containing the information
as to the five largest shareholders and the proportion of shares in the
hands of the public, receipt of which was the condition imposed by the
Board of Management for final approval of the full listing application.
Giarrusso said that it was in the discretion of the Board to require a list
of shareholders, but in this case they did not; if the Board had known
of the Don Mills arrangement, they would not have considered these
125,000 shares as being in the hands of the public; and that if private
companies, controlled directly or indirectly by a director or officer of
the company making the application held shares in it, the extent of such
holdings would not be considered as being public participation. A for-
tiori the same considerations would apply to the registration of shares
in the names of persons who executed powers of attorney, and gave to
a director physical possession of the shares with the names of transferees
in blank. Thus Wagman, who held the Dallas Holdings shares in trust
and had physical possession of the shares fraudulently transferred from
the names of nominees who had never in fact been subscribers for the
stock of Commodore Business Machines, was in a position as a director
of the company that directly contravened the requirements of the ex-
change at the time the application was made. A comparison of the con-
temporary listing application0 with that now prevailing7 shows that much
more information as to the true distribution of shares is at present
demanded from an applicant, but there is still no protection, as this
witness confirmed, against deliberate misrepresentation, short of requir-
ing an affidavit of bona fides from every shareholder. This appeared to
Giarrusso to be impossible to obtain, and to be of doubtful value even if
such affidavits were forthcoming; moreover deliberate frauds, such as
were committed here, would not be revealed without a searching and
prolonged investigation if the offenders were prepared to resort to for-
gery. I am prepared to accept this conclusion, but it is more difficult to
accept the failure of the Canadian Stock Exchange to take disciplinary
action against Commodore Business Machines once the facts surround-
ing the application to list its shares were made public. It is true that
there is danger of injuriously affecting the investment of innocent people,
6Exhibit 2264.
•Exhibit 2259.
'Exhibit 2257.
342
Chapter VIII
but the affairs of this company are still in hands deeply imbrued with
the pitch which originally defiled them in 1962, and into which they have
been plunged again and again in succeeding years.
Appearance of Don Mills in the Commodore Business Machines
Prospectus
Both Irwin Singer and Carl Solomon were questioned before the
Commission as to their knowledge of Don Mills. Singer, who was. in the
firm of Solomon, Singer & Rosen, the partner particularly engaged in
the preparation of the listing application and the prospectus for the
public offering of 300,000 shares, said that he did not know the identity
of the beneficial owners of the shares attributed to Don Mills in May,
1962, nor, when he wrote his letter of July 26 to the exchange, what
Don Mills was. He testified that he had inquired in 1962 and been told
by Tramiel, or Kapp, or Morgan that this was a Georgia corporation, and
felt that his informant was not inclined to give him any further infor-
mation, or indeed to explain why the abbreviation "Inc." was not in-
cluded in its style. Although he was not sure whether he inquired
specifically at the time of writing the letter about the five largest share-
holders, he recalled feeling, when he received this answer, that it was a
facetious one, and that he was being politely told to mind his own busi-
ness. He had little doubt that Don Mills had some connection with
Tramiel or Kapp because of his association of that name with their place
of residence. The true significance of Don Mills had not been revealed
to him until some six months before he testified, in the course of a civil
law suit.1 Much the same was said by Solomon, who committed himself
to the extent of saying that in 1962 he assumed that Tramiel and Kapp
had an interest in Don Mills, and that he remembered having been told
that it was an American company by Tramiel, or Kapp, or Morgan.
Questions on this point were directed to the particular significance of
Don Mills in the light of paragraph 29 of the prospectus:2
"No person is known to be, by reason of beneficial ownership of
securities of the Company, in a position to elect or cause to be elected
a majority of the Directors of the Company. The persons referred to
in Paragraph 4 hereof, to which reference is hereby expressly made.
could, if they acted as a group, elect or cause to be elected a majority of
the Directors of the Company."
Paragraph 4 simply lists the directors as Tramiel. Kapp. Oremland,
Wagman, Strcit, King and Solomon and the officers as Jack Tramiel.
president and Manfred Kapp, secretary-treasurer. Solomon pointed out
that the statement contained in paragraph 29 was in accordance with
the known facts, and that he was not aware that Tramiel. Kapp and
1 Evidence Volume 106.
"Exhibit 345.
343
Commodore Business Machines
C. P. Morgan could have elected a majority of the board. Whatever in
fact was known about Don Mills by Solomon and Singer, it is barely
credible that they should not have found out the whole story, except on
the assumption that they were deliberately deceived. As to this, Singer
made a revealing comment when he mentioned the lack of a symbol
attached to the name of Don Mills indicating that it might have been a
corporation. The matter becomes more serious when one reflects that,
as far as the Canadian Stock Exchange was concerned, the word "Don"
might have been the abbreviated Christian name of a Mr. Mills. In any
event these two lawyers were at best too compliant, and at worst parties
to a deceit practised on the Canadian Stock Exchange, and to a lesser
extent on the Securities Commissions of the provinces of Ontario and
Quebec. Since they actively assisted Walton, Wagman and Morgan in
creating an illusion of public distribution of the shares of Commodore
Business Machines, it is very difficult to give them the benefit of any
doubts.
Commodore Industries Limited of Jamaica and the
Quick Adding Machine Rights
Before leaving the subject of the prospectus, paragraph 26 should
be quoted:1
"No material contract has been entered into by the Company within
the two years preceding the date hereof other than contracts entered
into in the ordinary course of business carried on or intended to be
carried on by the Company, and the contracts referred to in Para-
graphs 9 and 21 hereof, to which reference is hereby expressly made,
and a contract between the Company and Commodore Industries
Limited, made as of July 3, 1961. Pursuant to the terms of this latter
contract, Commodore Industries Limited assigned to the Company the
exclusive North American rights to assemble and sell 'Quick' Adding
Machines, in consideration for either royalty payments based on sales,
nor to exceed in the aggregate $125,000.00, or a cash payment of
$100,000.00. Reference is hereby expressly made to Note 3 to the
accompanying Consolidated Balance Sheet as at February 28, 1962.
Messrs. Tramiel and Kapp are the owners of all the issued capital
stock of Commodore Industries Limited.
Copies of the above-mentioned agreements may be inspected during
ordinary business hours at the head office of the Company, 680 King
Street West, Toronto, Ontario, at any time during the period of primary
distribution to the public of the securities offered hereby."
The reference to paragraphs 9 and 21 is explained by the infor-
mation, given in paragraph 9, as to loan agreements between the com-
pany and Commodore Sales Acceptance, and between Commodore
Business Machines Inc. and Commodore Factors, and, in paragraph 21,
1Exhibit 345.
344
Chapter VIII
of the transactions with George Purvin and the acquisition of all the
shares of Commodore Business Machines Inc. by the parent company.
The remainder of paragraph 26 deals with transactions which were not
fully understood at the time of Mr. Wolfman's evidence, and which later
investigation enabled counsel to explore further in his examination of
Jack Tramiel. This examination as a whole extended over a period of
four days, and was a most laborious process because it involved putting
a multitude of documents to Tramiel in order to refresh, and indeed to
discipline his volatile memory. By minute of the board of directors
of Commodore Portable Typewriter,2 said to consist of Tramiel, Kapp,
Wagman, King, Medland and Streit, dated July 3, 1961 and signed by
Tramiel and Kapp, the secretary, who was Kapp, was reported as advis-
ing the meeting about negotiations which he had conducted with Com-
modore Industries Limited, a company incorporated under the laws of
Jamaica, for the assignment to Commodore Portable Typewriter of all
the rights of Commodore Industries Limited in an agreement entered
into by it with Typewriter Sundries Company Limited of the United
Kingdom. Two agreements, one between Commodore Industries and
Typewriter Sundries, and the other a draft agreement between Commo-
dore Industries and Commodore Portable Typewriter, were expressed
to have been added to the minutes as Schedules A and B, but only the
latter survives. It, however, recites the date of the former as having been
June 15, 1961 and provides for the assignment by the Jamaican company
to Commodore Portable Typewriter of the former's North American
rights to the Quick adding machine on the basis of royalities for each
machine sold for a period of five years, but in any event not to exceed
total payments of $125,000 in Canadian funds, and confers a right
on the assignee to buy this interest at any time for $100,000.
The agreement was signed for Commodore Industries by Manfred
Kapp, and for Commodore Portable Typewriter by Jack Tramiel, and
both Tramiel and Kapp agreed that they owned between them all the
shares of Commodore Industries. Just what were the terms of the orig-
inal agreement with Typewriter Sundries, if it ever existed, can only be
surmised, and at one point Tramiel suggested that Markus had
given him these rights for no consideration at all. Note 3 to the consoli-
dated balance sheet as at February 28, 1962, included in the prospectus,
says that "the collectibility of advances to Commodore Industries Lim-
ited— Jamaica is dependent upon the revenue the Jamaican Company
would receive from a contract in which the franchise rights of the
'Quick' adding machine are leased to Commodore Business Machines
(Canada) Limited and its subsidiary". The advances referred to are
shown under the heading "other assets" on the balance sheet as amount-
ing to $92,097.37, and include travelling expenses of Tramiel to and
•Exhibit 322.
345
Commodore Business Machines
from Jamaica which had been charged to Commodore Portable Type-
writer. Tramiel maintained that the Jamaican company, the books and
records of which he had left in Jamaica, was incorporated in 1960 at
the time when the rights to the Quick adding machine had first been
acquired from Markus, that Commodore Industries was assembling type-
writers in Jamaica and selling them in the United States and Canada
under an advantageous tax arrangement with the Jamaican government
and that Commodore Industries had suffered a loss in the process. There
seems to be no doubt that some such assembling operation was carried
on in Jamaica, and that Commodore Portable Typewriter had indeed
made advances to a company wholly owned by two of its directors, a
debt which was subsequently extinguished by the transfer to Commo-
dore Portable Typewriter of the Quick adding machine rights which
should have enured to it in the first place. A question arises as to how
much was known about the Jamaican operation by the other directors
of Commodore Portable Typewriter. King recalled knowing that Tramiel
and Kapp had started such an enterprise with a view to bringing type-
writer parts from Czechoslovakia and assembling them in Jamaica, and
that there were supposed to be tax concessions involved. He believed
that both he and Douglas Annett knew that Tramiel and Kapp had made
an investment in Jamaica, but not that they were the sole owners of the
Jamaican company. None the less, he signed the prospectus which dis-
closed that fact. Morgan had told him that the Jamaican company was
a failure and that $100,000 was needed to pay for the rights to the Quick
adding machine acquired by it. Medland simply did not remember the
meeting of July 3, 1961, but remembered Jamaica being discussed in
some conversation about Tramiel, Kapp, Morgan and two other people
having built a plant there because of the favourable tax arrangements
conceded by the Jamaican government. The story of the rights to dis-
tribute and manufacture the Quick adding machine must be resumed
later, but thus far the whole purpose of the agreement authorized by the
meeting of July 3, 1961 appears to have been the rescue of Tramiel and
Kapp from the unprofitable results of their own enterprise by the com-
pany to which they were bound to devote all their efforts, and which had
borrowed some $175,000 from Medland, King and Streit, not to men-
tion much larger amounts from Atlantic Acceptance.
The Don Mills Shares
It has been seen that C. P. Morgan secured for himself and his
associates, with money advanced by Atlantic, some 85% of the 300,000
shares of Commodore Business Machines set aside for a public offering.
It remains to be seen how the Don Mills block of 125,000 shares, of
which 112,500 were subject to escrow, were disposed of. The essential
information is to be found in the working papers of Walton, Wagman &
346
Chapter VIII
Co., copies of which were apparently distributed to the principals, and
one of which was supplied by Manfred Kapp to Mr. Wolfman.1 It is
headed "Don Mills statement'*, and contains a list of persons and the
number of shares sold to each at prices which range from $1.70 to $2.50
per share. There is a minor discrepancy in that the list of names headed
"C. P. Morgan"' does not contain the name "Judge Rodgers" who was
shown on the other list as being entitled to 50 shares at $2, for which
$63 had apparently been paid but the shares not delivered. On the
assumption that this purchase was not completed and $63 repaid, it
appears that the total number of shares sold was 54,792 for $130,897,
18,042 free shares and 36,750 escrowed shares being delivered.
Most of the purchasers of the free shares were individuals and paid
$1.70 per share or $2 for escrowed shares, the only exception being
Martha Prokoph who paid for 100 free shares at a price of $2.50 per
share. Martha Prokoph was Manfred Kapp's book-keeper, and it is not
clear why she was singled out for this distinction. The remaining pur-
chasers are two in number and both corporations. Pearlsound Distribu-
tors bought 10,592 free shares at $2.50, paying $26,480 in cash, and
Evermac Office Equipment 17,500 shares for $52,500, equivalent to
$3 per share and paid for in a manner to be described below, the shares
being escrowed. Next to this schedule is a "summary of share distribu-
tion", indicating that 5,542 more free shares than Don Mills' available
12,500 had been delivered, and that this deficiency had apparently been
made up by an exchange of the same amount of escrowed shares. The
balance of these is recorded as 70,208, and below this entry appears a
detail of distribution as follows:
"C. Powell Morgan 23,403
JackTramiel 23,403
Manfred Kapp 23,402
70,208"
This is followed by a heading, "Summary of Cash Distribution", show-
ing total cash received of $130,897.11 from which is deducted prin-
cipal and interest on the loan to Don Mills from Aurora Leasing in the
amount of $106,604.33, leaving a balance of $24,292.78 distributed to
C. Powell Morgan in the amount of $8,097.60, Jack Tramiel $8,097.59,
and Manfred Kapp $8,097.53. Aurora was not so fortunate with its
loan of $94,500 to Don Mills for the purchase of the Streit shares from
Valley Farm and Enterprises, $75,034 of which remained unpaid at
June 17, 1965.
The source of funds for the purchases of these shares by Pearlsound
Distributors, then owned by N.G.K. Investments, and by Evermac Office
Equipment was inevitably Commodore Sales Acceptance, which issued
'Exhibit 2159.
347
Commodore Business Machines
cheques to Pearlsound for $28,000 dated August 15, 19622 and for
$53,000 to Evermac on the same day.3 Pearlsound issued its cheque
for $26,480 to Don Mills,4 and Evermac paid $52,500 to Don Mills by
cheque drawn on its behalf by Kapp5 and endorsed "Don Mills per M.
Kapp", both cheques being deposited to the credit of Aurora. Evermac,
however, did not get its 17,500 shares, but assigned its right to them to
N.G.K. Investments in due course in exchange for all the shares of
Pearlsound. Thus Aurora was repaid to the extent of $78,980 by these
two companies with money borrowed from Aurora without security, and
the balance of the loan was discharged by sales of shares to some 38
individuals who, Kapp averred, were mostly employees of Commodore
Business Machines. Pearlsound, as a subsidiary of N.G.K. Investments,
was under the direction of C. P. Morgan and Evermac was owned by
Tramiel and Kapp.
A brief summary of the operations of Don Mills would, at this
point, not be out of place. Don Mills, as already noticed, acquired 250
of the old shares of Commodore Portable Typewriter by borrowing
$100,000 from Aurora, which Commodore Portable Typewriter treated
as a loan, and repaid it by issuing these shares which became 125,000
shares of Commodore Business Machines. They were subject to an
escrow agreement whereby they were not supposed to be sold other
than to parties to the agreement and to employees of Commodore Busi-
ness Machines who had adhered to it, only 12,500 shares remaining free.
On or about August 15, 1962 Don Mills sold 54,792 of these shares to
some 40 purchasers who were largely individuals buying shares in small
lots, but included Pearlsound which bought 10,592 free shares at $2.50
a share, and Evermac which bought escrowed shares at $3 a share, the
latter purchase, at least, being contrary to the provisions of the escrow
agreement. The purchases by these two companies, the affairs of which
were controlled by Morgan, Tramiel and Kapp, put $78,980 into then-
hands by borrowing from Commodore Sales Acceptance, a company
entirely under Morgan's control, and this amount was paid, together
with a balance derived from the small subscriptions, to Aurora Leasing
Corporation, a company which was effectively in the hands of Morgan,
Walton and Wagman, and extinguished the original loan made by Aurora
to Morgan, Tramiel and Kapp. As a result Morgan, Tramiel and Kapp
were each entitled to one-third of the 70,208 shares, still in escrow,
free in their hands, and to an equal division of $24,292.78. All of this
is accomplished in secrecy, with concealment from the other directors
of Commodore Business Machines made easy by what must be fairly
described as a singular lack of curiosity on their part, assisted by the
connivance of the company's solicitors, Messrs Solomon, Singer & Rosen.
"Exhibit 2160.
"Exhibit 2162.
'Exhibit 2161.
8Exhibit2163.
348
Chapter VIII
The distribution of cash mentioned above was not complete until Janu-
ary 29, 1963, when Morgan received a cheque for $8,097.60 drawn by
Kapp on account No. 2327 which he shared with Tramiel at the Toronto-
Dominion Bank at King and Bathurst Streets.6
Associated Canadian Holdings Limited
The range of trading in Commodore Business Machines shares, in
an exceptionally thin market, was from $2.70 to $3.05 in July of
1962, $2.75 to $4.25 in August, $4.20 to $4.50 in September, $4 to
$4.50 in October, $4 to $4.25 in November, $3.90 to $4.25 in
December and, in January, 1963, $4 to $4.45. The first release of escrowed
shares occurred on April 2, 1963, according to a letter from the Eastern
Trust to Solomon, Singer & Rosen1 affecting 154,800 shares, and was
completed on July 2, according to the tenor of a second letter of that
date with respect to 309,600 shares.2 C. P. Morgan was now concerned
with controlling the market for Commodore Business Machines' shares,
consequent upon the release of these very substantial holdings, particu-
larly of the 315,000 shares which he and his wife, the Tramiels, Kapps
and Silbermans were now free to dispose of. His solution, which with
some difficulty he persuaded Tramiel and Kapp to adopt, was the incor-
poration of Associated Canadian Holdings Limited on June 27, 1963.3
This was a private Ontario company with authorized capital of 1,000,000
preferred shares, with a par value of $5 each, and 1,000,000 no par value
common shares. The five permanent directors after incorporation were
Tramiel, Kapp, Wagman, Solomon and Singer, Tramiel being president,
Kapp vice-president and treasurer and Singer secretary. On July 10, a
day which produced transactions of considerable size and great com-
plexity, the decision was taken for Associated Canadian Holdings to buy
Commodore Business Machines shares held by the Morgan, Kapp, Tra-
miel and Silberman families, W. L. Walton and Harry Wagman, by
issuing in exchange one common share and one-half of one preference
share for each share of Commodore Business Machines purchased. The
Morgans and Silbermans gave up, on this basis, all of their shares released
from escrow, and the Tramiels and Kapps a portion only, but sufficient
to secure for them a position in Associated Canadian Holdings of some
60% of the issued stock. The financial statement of the company pre-
pared by Walton, Wagman & Co. as at July 15, 1963, under the heading
of "investments at cost" of that date, includes 227,902 shares of Com-
modore Business Machines and 100,000 shares of The Dale Estate
Limited. Two letters from the company to C. M. Solomon, signed by
Jack Tramiel and dated February 13 and February 27, 19644, set out
•Exhibits 2164 and 2164.1.
'Exhibit 858.1.
"Exhibit 858.2.
•Exhibit 369.
'Exhibits 823.1 and 823.2.
349
Commodore Business Machines
the names of the shareholders and the amounts of preferred and com-
mon stock attributed to them, and should be noted because, in the first
letter, W. L. Walton is listed as having 7,500 preferred shares and 15,000
common shares. The second list disposes of these by dividing them
equally between C. P. Morgan and Harry Wagman.
"No. of
No. of
Shares
Shares
Preferred
I
Common
$5.00
Amount
$1.00
Amount
Total
M
Kapp
42,178
210,890.00
84,356
84,356.00
295,246.00
E.
Kapp
5,850
29,250.00
11,700
11,700.00
40,950.00
J.
Tramiel
43,679
218,395.00
87,357
87,357.00
305,752.00
H.
Tramiel
5,850
29,250.00
11,700
11,700.00
40,950.00
B.
Silberman
4,050
20,250.00
8,100
8,100.00
28,350.00
R.
Silberman
8,325
41,625.00
16,650
16,650.00
58,275.00
C.
P. Morgan
26,118
130,590.00
52,237
52,237.00
182,827.00
M
Morgan
7,500
37,500.00
15,000
15,000.00
52,500.00
H.
Wagman
14,250
71,250.00
28,500
28,500.00
99,750.00
157,800
789,000.00
315,600
315,600.00
1,104,600.00"
The intrusion of the Dale Estate shares (which for the moment
will mean "The Dale Estate Limited") into a portfolio otherwise devoted
to those of Commodore Business Machines must now be accounted for.
The books of Associated Canadian Holdings5 show that the company
issued its own shares to the value of $350,000 to Jack Tramiel and
Manfred Kapp, and received in exchange 100,000 Dale Estate shares
and $50,000 in cash. Tramiel and Kapp received the $50,000 from the
Trio account at the Guaranty Trust Company, according to the passbook
of that account,6 by a cheque for that amount. Their acquisition of the
100,000 Dale Estate shares is explained by a handwritten memorandum
from the files of Walton, Wagman & Co.7 which begins "100,000 C.B.M.
tax paid sold to Associated Canadian Holdings for $490,000". It con-
tinues "J. Tramiel trades 100,000 Dale and $50,000 to A.C.H. for
50,000 A.C.H. preferred and 100,000 A.C.H. common". Just above this
is a note to the effect that 100,000 shares of Commodore Business
Machines were traded to the "Trio" for 100,000 Dale, acquired by
"H.W." buying 70,000 Dale shares from Dallas Holdings for $192,500,
26,225 shares from the Trio for $80,000 and, finally, 3,775 shares from
Barrett, Goodfellow & Co. and Dallas Holdings for $11,325, the total
of 100,000 shares of Dale Estate being assigned a cost of $283,825.
•Exhibit 2165.
•Exhibit 807.
7Exhibit2166.
350
Chapter VIII
The Trio account passbook provides evidence of these payments show-
ing a withdrawal in favour of Dallas Holdings, "re 70,000 Dale at $2.75
$192,500"; there is another entry showing $80,000 to "C.I.B.C", this
recording a payment to the Canadian Imperial Bank of Commerce to
release the 26,220 shares of Dale Estate pledged against a loan to
Morgan, Walton and Wagman; a further entry reads, "Barrett, Good-
fellow & Co. 2.775 Dale at $2.75, $70,631.25". Thus far Morgan,
Walton and Wagman had given Tramiel and Kapp 100.000 shares of
Dale Estate and $50,000 in cash, and had received 100,000 shares of
Commodore Business Machines, Tramiel and Kapp getting as many
shares of Associated Canadian Holdings for their Dale Estate shares
plus $50,000 as they would if they had delivered 100,000 shares of
Commodore Business Machines directly to Associated Canadian Hold-
ings. But then the Trio took their 100,000 Commodore Business
Machines shares and sold them to Associated Canadian Holdings for
$490,000 which was paid by cheque dated July 10 from Associated
Canadian Holdings to the Guaranty Trust Company8 in the amount of
$490,000, the deposit of which was recorded in the Trio account pass-
book. The deposit slip contains handwritten notations reading "exchange
100,000 shares Dale, $3 = $300,000 — cash $50,000 Tramiel and
Kapp"; there follows a total of $350,000, and the note continues "sold
100,000 C.B.M. at $490,000— gain $140,000". There is a similar legend
in almost the same words at the top of the page of the passbook in
which the deposits and withdrawals are recorded.9 Although the re-
corded profit is one of $140,000 for the Trio, this is on the basis of
attributing a value to the Dale Estate shares of $3 each, but since it
has been seen that the 100,000 Dale Estate shares were assembled at
a cost of $283,825, the profit of Morgan, Walton and Wagman was
really in excess of $156,000.
It is almost unnecessary to say that this company. Associated Cana-
dian Holdings, borrowed the $490,000 from Aurora Leasing Corpora-
tion, and the statement of its account with the Bank of Nova Scotia
shows a deposit of $750,000 on July 10 for which a promissory note.
bearing the same date, was given to Aurora by Associated Canadian
Holdings, signed on its behalf by Manfred Kapp and Harry Wagman.
and bearing interest at %Vi%}°
The Five Wheels Transaction and its Reversal
At the conclusion of Mr. Wolfman's evidence on May 19. 1966.
Mr. Shepherd stated to the Commission that the remainder of the events
of July 10, 1963 were exceedingly complex. It transpired that Associ-
ated Canadian Holdings paid over the $750,000 borrowed from Aurora
"Exhibit 2167.
"Exhibit 807.
10Exhibits2168 and 1639.1.
351
Commodore Business Machines
Leasing to Commodore Business Machines, recording it as a loan to the
latter, and Commodore Business Machines paid it, in turn, to a company
called Five Wheels Limited, a public company engaged in the business
of leasing automobiles and trucks, the principal shareholder of which
was Albert A. Shelman.1 The major portion of the $750,000 thus mov-
ing physically from hand to hand on July 10, was provided by Aurora
Leasing from advances made by Commodore Sales Acceptance. Com-
modore Business Machines, by paying it to Five Wheels, acquired 100,000
common shares of that company as indicated by its ledger sheet No. 159.2
These shares became the subject of an agreement,3 dated July 4, 1963, in
the form of a letter addressed to C. P. Morgan by one Allen S. Manus,
a Toronto born and trained stock promoter who, with his brother Cecil,
has provoked the interest of law enforcement agencies in the United
States, and even in the Bahama Islands, but whose operations must await
examination in Chapter IX dealing with the investment of Atlantic
money in the Lucayan Beach Hotel and allied enterprises. The gist of
the agreement, in so far as Commodore Business Machines is concerned,
is that, firstly, the parties agreed to exchange 100,000 shares of Com-
modore Business Machines for the same number of the common shares
of Five Wheels; secondly, the company's 100,000 shares of Five Wheels
were to be deposited in a voting trust, pursuant to agreement with the
Crown Trust Company, together with 100,000 shares registered in the
name of Shirley Shelman and 100,000 shares belonging to Molly Corpo-
ration, a company promoted by the Manus brothers, to form a block of
shares to be voted together in accordance with instructions to the Crown
Trust Company from any two of Commodore Business Machines, Molly
Corporation or Mrs. Shelman; thirdly, Five Wheels was to hold a
special general meeting of its shareholders to authorize a split in its
stock of two shares for one, and an increase in the board of directors
from four to nine, four constituting a quorum. C. Powell Morgan was
to be chairman of the board, Albert A. Shelman president and Jack
Tramiel and Allen S. Manus, among others, to be directors. The agree-
ment was signed by C. P. Morgan, Allen S. Manus and Shirley Shelman.
Although this transaction was completed on July 10, the purchase
of an interest in Five Wheels was not raised with the board of Commo-
dore Business Machines until July 16, and at this meeting the chairman,
C. P. Morgan, was asked to obtain further information and report back.
There is no further reference to the matter in any succeeding minute.
Then it became known to Aubrey Medland who, incredible as it may
seem, had read about its completion in a newspaper. Medland called
Douglas Annett, also a director at the time, and his reaction was equally
Exhibit 2169.
'Exhibit 2170.
"Exhibit 2171.
352
Chapter VIII
indignant. Medland's second call was to his own broker with instruc-
tions to start selling the shares of Commodore Business Machines. He
knew that he would hear from somebody fairly quickly, and, indeed,
shortly after the selling began, he received a telephone call from C. P.
Morgan who had learned he was selling to the point of breaking the
market. Morgan went to see Medland, admitted that it was all a mis-
take and received Medland's undertaking to desist from selling if the
deal were cancelled. Medland said he had nothing particular against
Five Wheels, but he did not like the people connected with it and, as
he remarked, "one recognizes some of the names". He objected prin-
cipally to the failure to inform the directors as to what had transpired,
and this, he said, was his one major difference of opinion with Morgan,
Tramiel and Kapp during his association with Commodore Business
Machines.4
The method of reversing the transaction adopted by Morgan and
Tramiel was to have Commodore Business Machines and Associated
Canadian Holdings enter into a "put option contract", giving the former
company the right to sell its 100,000 shares of Five Wheels at a price of
$7.50 per share at any time, up to and including October 15, 1963 to
Associated Canadian Holdings.5 Five Wheels had paid $500,000 to
Associated Canadian Holdings for its 100,000 shares of Commodore
Business Machines, giving the former a profit of $10,000 from its pur-
chase of these shares from the Trio at $490,000, and a deposit slip6
shows a deposit in the Bank of Nova Scotia account of Associated
Canadian Holdings on July 10 of $550,000. The slip is marked to
identify $500,000 of this as coming from Five Wheels in relation to
the purchase of 100,000 shares of Commodore Business Machines, and
$50,000 from "H. Wagman". This was the same $50,000 paid by Wag-
man to Tramiel and Kapp, and by them to Associated Canadian Hold-
ings. This is followed by a notation showing $50,000 plus 100,000
common shares in "Dale Estates Ltd." exchanged for 100,000 common
and 50,000 preferred shares in Associated Canadian Holdings. The
reversal of the Associated Canadian Holdings loan to Commodore Busi-
ness Machines in the amount of $750,000 occurred in November as a
result of the exercise of the put option by Commodore Business Ma-
chines, and the resulting acquisition of these shares of Five Wheels by
Associated Canadian Holdings for that amount.
Summary of the Events of July 10, 1963
An effective summary of the events of July 10, as modified by the
unforeseen rejection of the investment in Five Wheels by the "outside"
'Evidence Volume 92.
'Exhibit 823.3.
•Exhibit 2172.
353
Commodore Business Machines
directors of Commodore Business Machines, was put by Mr. Shepherd
in interlocutory form.1
"Q. Now, this being a somewhat complicated matter I would like to see
if I have it right. I have it that all the steps occurred on the 10th of
July, 1963; is that correct?
A. That is correct.
Q. And the first thing that happened is that Aurora borrows $750,000,
or the greater part thereof from Commodore Sales Acceptance; is that
correct?
A. That is correct.
Q. And then, Aurora — when I say then, I appreciate it all happened on
the same day, but taking it in order, Aurora then loaned $750,000 to
Associated Canadian Holdings; is that correct?
A. That is true.
Q. Associated Canadian Holdings loaned the $750,000 to Commodore
Business Machines; is that so?
A. That is correct.
Q. Commodore Business Machines pays the $750,000 to Five Wheels
Limited and receives 100,000 common shares of Five Wheels Limited?
A. That is correct?
Q. And stopping there for a moment. When the purchase of 100,000
shares of Five Wheels Limited comes before the Board of Directors of
Commodore Business Machines for the first time, so far as the minutes
disclose on the 16th of July, 1963, the investment of this sum is not
authorized, but that the President is directed to go back and get
further information for the Board; is that so?
A. That is correct.
Q. So, on that date, the 16th of July, 1963, or by a document bearing
that date, Associated Canadian Holdings grants to Commodore Busi-
ness Machines (Canada) Limited a put option contract whereby Asso-
ciated Canadian Holdings binds itself to purchase the shares of Five
Wheels for $750,000 at any time up to the 15th of October, 1963, pur-
chase from Commodore Business Machines?
A. That is correct.
Q. Five Wheels Limited now has $750,000 and it pays $500,000 to
Associated Canadian Holdings. And it receives in return for that sum
100,000 shares of Commodore Business Machines?
A. That is correct.
Q. Associated Canadian Holdings got the 100,000 shares of Commo-
dore Business Machines by purchasing on that same day from — what
Mr. Wagman refers to as the trio, for $490,000; is that correct?
A. That is correct.
'Evidence Volume 36, pp. 4892-5.
354
Chapter VIII
Q. And the trio got these shares of Commodore Business Machines by
purchasing them from Messrs. Tramiel and Kapp for 100,000 shares
of the Dale Estate Limited plus $50,000 in cash. And the parties
attributed a value of $300,000 to the Dale Estate shares?
A. That is correct.
Q. So, that the effect of the transaction then was to put $250,000 net
cash into Five Wheels Limited, to put $10,000 net cash into Associated
Canadian Holdings Limited, and to put $140,000 net cash into the
hands of the trio. If one adopts the parties declaration that the shares
of the Dale Estate were worth $300,000, although they didn't cost the
trio $300,000?
A. That summarizes it exactly."
Five Wheels employed the $250,000 thus obtained, according to
the terms of a letter dated November 30, 1963 to Grand Bahama
Development Company Limited and the Grand Bahama Port Authority
Limited at Freeport, Grand Bahama Island,2 by advancing $250,000
in United States funds to its wholly owned subsidiary Five Wheels of
Grand Bahama Limited "towards the cost of dredging and the prepara-
tion of the marina site on Lucayan Beach". This becomes part of an-
other story. The Trio's profits from the transactions of July 10 were
used to extend a loan of $100,000 to a company by the name of Jacroy
Canada Limited, a subsidiary of the Symphony Paint Company of
Cleveland to which Atlantic Acceptance had lent substantial sums
through Commodore Factors, amounting to an aggregate of over one
and a half million dollars by July 17, 1965, as described in Chapter XIV.
For this a note was given to "H. Wagman in trust" bearing interest at
6% and payable on demand, dated July 11 and signed for the bor-
rower by L. D. Koryta as president. The note is marked "pending stock
issuance 7/11/63 planned".3 This loan was not repaid and is the sub-
ject of a claim by Harry Wagman against the trustee in bankruptcy of
Jacroy Canada Limited. On September 11, $50,000 was paid out of
the Trio account to Masco Construction Company Limited for a pur-
pose which, again, will appear in Chapter IX dealing with the affairs
of the Lucayan Beach Hotel.
According to C. P. Morgan this was his first encounter with Allen
Manus, and the beginning of an association which was, perhaps more
than any other, an immediate cause of the disaster which befell Atlantic
Acceptance Corporation. He testified1 to the effect that the introduction
was made at a meeting called by Albert Shelman of Five Wheels at the
Royal York Hotel in Toronto, attended also by Jack Tramiel. Shelman
was interested in extending his company's car-leasing operations to the
Bahama Islands, and Tramiel was at that time contemplating leasing
'Exhibit 2173.
"Exhibit 1704.1.
'Evidence Volume 26.
355
Commodore Business Machines
business machines across Canada. Morgan described the reciprocal pur-
chases of stock by Five Wheels and Commodore Business Machines as
a deal involving only Five Wheels and Associated Canadian Holdings,
but went on to mention the presentation of the transaction to the board
of Commodore Business Machines, and its frustration by the objection of
Carman King without referring to Medland or Douglas Annett. Under
the circumstances prevailing at the time he gave his evidence to the
Commission some confusion is understandable, and it would appear to
be clear that it was at first contemplated that Commodore Business
Machines would be directly involved with Five Wheels, that the agree-
ment had been made in all respects before the Commodore Business
Machines board was consulted, and that the introduction of Associated
Canadian Holdings was necessary to carry out the terms of the agree-
ment made on July 4 with Shelman and Manus. For the first time
Morgan and Tramiel had over-estimated the complaisance of their
fellow-directors.
The Dale Estate Underwriting
Before leaving the events of July 10, 1963 a brief excursion must
be made into the affairs of the Dale Estate, the shares of which played
a vital part in what transpired. Their appearance in the hands of Mor-
gan, Walton and Wagman raises the curtain on a financial coup involv-
ing characteristic misuse of Atlantic funds and considerable profit to the
Trio. According to Morgan, the Dale Estate underwriting was "brought
to me by Bill Walton", and Walton testified that at first it was solely his
idea, but that the enterprise was too big for him to handle and he had
called upon Morgan for assistance. Dale Estate Limited was a closely
held family corporation in which was vested the assets of a well known
firm of flower-growers in Brampton, Ontario. On July 25, 1961, Morgan
obtained options from all the shareholders of Dale Estate Limited to
purchase the 4,480 outstanding shares at $325 per share. According to
instructions given to Carl Solomon in a letter dated September 26,1
Morgan assigned the benefit of these options to Walton, and on October
12 they were exercised and payment made in the aggregate amount of
$1,455,036.76 through the trust account of Solomon & Samuel. The
shares were transferred principally to Carl M. Solomon in trust to the
number of 4,474, one share each remaining in the hands of D. M.
Dickson, William Brydon and W. A. Beatty, Sr. representing the previ-
ous ownership and L. Murray Eades, David Samuel and Carl M. Solo-
mon representing its successor, but, in any event, apparently for the
benefit in every case of a Bahamian company known as Oceanic Invest-
ment Company Limited. This company was incorporated on September 1,
Exhibit 4434.1.
356
Chapter VIII
1961 at the instance of the Bank of Nova Scotia Trust Company (Baha-
mas) Limited, and through the agency of a solicitor in Nassau by the name
of Stafford L. Sands, later to become notorious as Sir Stafford Sands,
C.B.E., Minister of Finance and Tourism in the United Bahamian Party's
government of the Bahama Islands. Its shares were purchased for the Trio
by W. L. Walton, according to information given to the Commission,
after he and his solicitor Hubert J. Stitt had conferred with officials of
the Bank of Nova Scotia in Toronto on October 12, and in New York
on Sunday, October 15. The company enjoyed brief life; it was struck
off the register on August 31, 1962, having served its purpose in connec-
tion with the part played by Morgan, Walton and Wagman in the public
offering of shares of a new company called, confusingly enough, The
Dale Estate Limited. The documents available in the office of the
Registrar General for the Bahama Islands in Nassau, copies of which
were supplied free to the Commission in this case, as in every case when
such documents were required, contain no information as to the activi-
ties of the company, beyond recording a change of address on October
30, 1961 from 309 Bay Street, Nassau, the chambers of Stafford Sands,
to that of the Bank of Nova Scotia Trust Company. On October 12, a
cheque for $2,000 was issued from the Trio account, and its purpose, if
not its destination, was indicated on the cheque stub2 by the words
"Oceanic Investment". When Solomon & Samuel reported on their work
for this company they addressed their communications to it at 62 Rich-
mond Street West in Toronto.3
In his letter to Solomon of September 26, Walton had said that
he would put the former in funds necessary to exercise the option in
the amount of $1,456,000. The funds, of course, came from Commo-
dore Sales Acceptance, which advanced them to C. M. Solomon in trust
without security, the loan being recorded in the books of Commodore
Sales Acceptance4 in an account entitled "Notes receivable — C. M.
Solomon in trust". The interest rate was a mere SV2 % . Solomon held this
very large amount of money in trust for Oceanic Investment and, after
disbursing it to the Dale Estate shareholders, paying the security trans-
fer tax on the subsequent sale by Oceanic Investment described below
and paying legal fees to L. Murray Eades and to his own firm, remitted
the balance of $11.47 to Oceanic Investment finally on December 19.
On October 19, Oceanic Investment sold the 4,480 shares of Dale
Estate to the following purchasers for the sum of $1,600,000:
Yarrum Investments Limited 1,792 shares
Annett & Company Limited 1,344 shares
Federal Farms Limited 1,344 shares
•Exhibit 806.
•Exhibit 1697.1.
'Exhibit 953.
357
Commodore Business Machines
Yarrum Investments Limited had been incorporated on June 23, 1959
as Colonial Sundry Wholesalers Limited, the permanent officers and
directors of which were W. L. Walton, Harry Wagman and E. A. Jef-
freys. The company was inactive until it was employed by the Trio to
make this purchase of Dale Estate shares from their Bahamian company,
and never had any assets except paid-up capital of $3 until it made the
purchase. The Toronto-Dominion Bank, through its King and Yonge
Streets Branch in Toronto, saw fit to lend this company (still called
Colonial Sundry Wholesalers Limited until its name was changed to
Yarrum Investments Limited on November 1, 1961) the large amount
of $640,000 against the security of 1,786 shares of Dale Estate regis-
tered in the name of Carl M. Solomon in trust, although personal guar-
antees were taken from Morgan, Walton and Wagman for $213,000
each. The whole amount of this loan was paid out on the day of its
deposit on October 19 to Carl M. Solomon in trust, who paid it on the
same day out of his trust account to Commodore Sales Acceptance.5
Thereafter Colonial Sundry Wholesalers on October 25 drew another
cheque on their account in the Toronto-Dominion Bank, now divested
of funds, in the same amount of $640,000 payable to the Bank of Nova
Scotia Trust Company (Bahamas) Limited. The payee in this case was
apparently doing the banking for Oceanic Investment, and its banking
was in turn done by its parent the Bank of Nova Scotia in an account
where withdrawals and deposits are simply entered as such, the docu-
mentation of deposits and withdrawals which might identify customers
of the trust company not being available, at least in Ontario. This pay-
ment of $640,000 was made in conjunction with payments by Annett &
Co. and Federal Farms Limited to acquire from Oceanic Investment
1,344 shares of Dale Estate apiece. On October 30, the $640,000 came
back into the overdrawn account of Colonial Sundry Wholesalers at the
Toronto-Dominion Bank, and the Bank of Nova Scotia's ledger card for
its Bahamian trust company6 shows that, of the $963,200 deposited
therein and representing the combined payments of Federal Farms and
Annett & Co., $825,000 had left it on October 27 and was deposited
in the bank's current account with Commodore Sales Acceptance.7 This
payment, together with the $640,000 borrowed from the Toronto-
Dominion Bank by Colonial Sundry Wholesalers and paid by Solomon
& Samuel to Commodore Sales Acceptance, repaid with interest the
whole amount of the latter company's original advance to C. M. Solomon
in trust.
The stage had now been set for the underwriting of the shares of
a new company by Morgan's pliant and still-favoured stockbrokers,
Annett & Co., and the attaining of a suitable interest by Federal Farms
'Exhibits 1697.5 and 1045.3.
•Exhibit 4446.
"Exhibit 4450.
358
Chapter VIII
which was to operate the Dale Estate undertaking. This was The Dale
Estate Limited, incorporated by letters patent in Ontario on October 20,
1961 to acquire the assets and undertaking of Dale Estate Limited, the
shares of which were now in the hands of Annett & Co., Federal Farms
and Yarrum Investments, for a total consideration of $1,610,000, pro-
vided by a first mortgage of $500,000 on the Brampton property given
to British Mortgage & Trust Company, $350,000 in IVx convertible
debentures bought by Federal Farms and $1,060,000, the product of
an underwriting of 400,000 treasury shares at $2.65 per share by Annett
Partners Limited, later offered to the public at $3 per share. The old
Dale company was in effect paid $1,460,000 in cash, and the balance
by allotment of 160,000 common shares of the new company valued
at $1 per share. Of this Yarrum Investments received $642,583.28, in-
cluding 60,000 shares of The Dale Estate Limited valued at $1 per
share, on the distribution of the assets of the old company ratably
amongst its shareholders on December 20. According to the analysis
of Mr. H. B. Walker of Touche, Ross, Bailey & Smart, who presented
the accounting evidence to the Commission on May 18, 1967, 8 Yarrum
Investments lost $3,755 on this distribution, mainly as a result of having
to pay interest on its bank loans. Yarrum's loss disappears if the 60,000
shares of The Dale Estate Limited in its hands are valued at either $2.65
per share, the price at which Annett Partners bought them, or $3 per
share, the price at which they were offered to the public, and becomes
a profit of either $95,250 or $116,250 respectively.9 Oceanic Invest-
ment made a profit of $137,435. The Toronto-Dominion Bank loan of
$640,000 was eventually paid off in September, 1962, and was substan-
tially reduced by cash payments arising out of the distribution of the
assets of the old Dale Company to its shareholders out of which Yarrum
Investments acquired $580,000 in cash.
This note on the participation of Morgan, Walton and Wagman
in The Dale Estate Limited underwriting does less than justice to Mr.
Walker's careful and well illustrated analysis of the evidence; nor does
it take into account subsequent dealings in the escrowed shares acquired
by Yarrum Investments between Yarrum and two other Trio companies,
Canada Motors Products (Toronto) Limited and Dallas Holdings Lim-
ited, which occurred between their original acquisition and the time
when they were required for assembling the 100,000 shares which were
employed in the transactions of July 10, 1963. At least two footnotes
must be annexed to this accoimt.
( 1 ) From the working papers of Walton, Wagman & Co. there is
a memorandum in the handwriting of W. L. Walton, dated March 17,
"Evidence Volume 111.
•Exhibit 4465.
359
Commodore Business Machines
1962, entitled "Schedule re cost of Dale shares."10 This is made up as
follows:
"60,000 subscribed at $1.00 = 60,000 — paid by Yarrum
(10,000 re W.P.G. at 1.00 = 10,000 \ ., . u.m
\_ re N.G.K. for 9,500/" paid by Hllltop
70,000 Escrowed Shares $79,500 Average cost $1.14
per share"
The memorandum goes on to refer to 50,000 shares bought through the
Canadian Imperial Bank of Commerce at $2.70 a share for a total of
$135,000, a purchase made on the instructions of C. P. Morgan on
December 8, 1961 from the underwriters, and records subsequent sales
which result in a balance of shares still held of 23,900, at an average
cost of $2.36 per share. The reference to "10,000 shares re W.P.G."
illustrates the purchase for cash by Hilltop Holdings Limited, a holding
company of Walton's, of 10,000 of the shares of The Dale Estate Lim-
ited from the old company, to fulfil a promise made to Wilfrid P. Gregory
that he would receive 10,000 of the shares of the new Dale company
at a price of $1 per share. When it was drawn to Gregory's attention
by Carman King that his position as president of the trust company,
which was mortgagee of the company's property, was not consistent with
his receiving its shares at a very substantial discount, he condescended
to accept free from C. P. Morgan a convertible note of N.G.K. Invest-
ments for $10,000, which evidently cost the Trio $9,500. The 10,000
shares purchased by Hilltop Holdings which were held in trust by Carl
M. Solomon were subsequently registered in the name of Gee & Co. as
nominee for the Canadian Imperial Bank of Commerce, and pledged
to that institution, eventually being released on December 4, 1964 to
Associated Canadian Holdings.11 Forty percent of the $10,000 in cash
paid to Dale Estates Limited came back to the Trio through Yarrum
Investments on the final distribution of assets of that company.
(2) On November 1, 1961 the Trio account at the Guaranty Trust
Company received a payment of $110,000, and on March 1, 1962 an-
other of $13,500. In between, and on November 15, 1961, a cheque
for $15,000 was paid out of account No. 9771 of the Guaranty Trust
Company, the Walton, Wagman & Co. trust account, and as to this
payment the only clue to its destination is an unsworn verbal statement
made by Walton, when in custody, that it was paid to Morgan "for
expenses". The amount of $110,000, and that of $15,000 which was
necessary to make the payment of November 15, are traceable to a
deposit in the Walton, Wagman & Co. trust account of $125,000 made
on November 1, confirmed by a deposit slip of that date bearing the
"Exhibit 1702.1.
"Exhibit 4461.
360
Chapter VIII
notation "B.N. Scotia $125,000".12 On the following day there is a
debit of SI 10.000 and a corresponding deposit in the Trio account pass-
book.13 marked '•transferred from trust account**. This is the only evi-
dence that the sum of $125,000. which must have represented most of
the profit made by Oceanic Investment, came from the Bank of Nova
Scotia. The ledger card of the Bank of Nova Scotia Trust Company
(Bahamas) Limited, covering the period October 31 to November 24,
1961,14 bears no trace of any corresponding withdrawal, and indeed the
method of deposit in the Walton, Wagman & Co. trust account would
indicate payment by cheque, or bank draft, rather than by transfer of
funds.
The interest and importance of this transaction reside in the fact
that it is an early example of the energy and lack of scruple displayed
by C. P. Morgan in enriching himself personally, and his indispensable
assistants W. L. Walton and Harry Wagman. at the expense of Commo-
dore Sales Acceptance, and ultimately of Atlantic Acceptance, of both
of which he was the president. The existence of a loan committee in
the case of either company would have made the advance of nearly one
and a half million dollars on no security for such an enterprise virtually
impossible, even if such a committee were prepared to advance a sum
of these propositions to Carl M. Solomon in trust for any dummy cor-
poration without assets. It also constitutes the first example, as far as
I am aware, of Morgan looking towards the Bahama Islands and using
a company resident there, the profits of which were not taxable. The
secrecy, and indeed obscurity, surrounding the disbursement of the profits
of Oceanic Investment were carefully contrived to conceal the identity
of the ultimate beneficiaries.
Manipulation of the Market for Commodore Business Machines Shares:
Distribution in Europe
By the end of July, 1963 Associated Canadian Holdings held just
over 400,000 shares of the 816,000 issued by Commodore Business
Machines, having acquired, since the middle of the month, 1 88.076 from
Valley Farm, Dallas Holdings and from among those held by Harry
Wagman in trust. Thereafter this company, with many of its shares of
Commodore Business Machines pledged with brokers against loans.
became heavily engaged in trading in them on the Canadian Stock
Exchange, and, indeed, off the exchange outside Canada.
With the stock now safely listed on the Canadian Stock Exchange.
and with public distribution, as they well knew, a travesty of what that
term usually suggests, the promoters of Commodore Business Machines
"Exhibit 765.1.
"Exhibit 807.
"Exhibit 4454.
361
Commodore Business Machines
were naturally anxious to dispose of some of their holdings to investors
whose remoteness from the scene, and relative unsophistication, would
provide some insurance against the stock, thus disposed of, coming back
to break the tenuous market in Montreal. The first evidence of an at-
tempt to place the shares of Commodore Business Machines off the
market in Continental Europe is provided by a letter, taken from the
files of Barrett, Goodfeilow & Co., to Investitions und Handelsbank A.G.
in Frankfurt am Main, Germany. This letter was first of all drafted in
long-hand by A. A. Amos of the Barrett, Goodfeilow firm, and then
typed in the following terms:
"This is to authorize you to establish a Depositary Trust Account on
our behalf for the deposit of 20,000 shares Commodore Business
Machines (Canada) Limited which are being shipped to you today by
Registered Air Mail.
You are further authorized to release the said stock against pay-
ment of a minimum of $3.00 United States Funds per share. This
amount is to be held in our account pending further instructions.
You are authorized to hold for the disposal of Mr. Harold Antin any
proceeds in excess of $3.00 US per share received from the sale of this
stock. Mr. Antin will give you his instructions regarding the disposal
of this excess.
Thanking you for your kind co-operation, we remain,
Yours very truly,
BARRETT, GOODFELLOW & COMPANY
A. A. Amos
P.S. It would be appreciated if you would forward to us any docu-
ments you may require to facilitate the establishment of our
account."
A copy of a letter in similar terms was addressed to the Bank Maerklin
at Hochstrasse 53 in Frankfurt, and one of the following letter, dated
April 10, to Investitions:
"With reference to our letter of March 28th and the shares of Com-
modore Business Machines (Canada) Limited which you are holding in
a Depositary Trust Account, subject to our instructions, this will be
your authority to deliver 10,000 shares of Commodore to Bank
Maerklin, Hoch Strasse 53, Frankfurt am Maine for our account
against no payment. We are writing Bank Maerklin to instruct them to
accept the shares from you."
These copies are attached to a memorandum, also dated April 10, headed
"From Amos to C. P. Morgan", and proceeding, "Attached are copies
of letters for your file. I am holding the originals subject to your ap-
proval. Please advise if satisfactory."1 From these it would appear that
'Exhibits 2123.1 and 2123.2.
362
Chapter VIIT
20,000 shares of Commodore Business Machines common stock were
split between the Investitions and Maerklin banks. Subsequently, by a
telegram dated April 30, Investitions was given the following instruc-
tions : 2
"You are hereby authorized to deliver 10,000 shares Commodore
Business Machines (Canada) Limited against no payment to Bank-
haus Marklin and Company, Hochstrasse 53, Frankfurt am Main for
our account. Kindly advise Mr. Antin if you require additional stock
and he will arrange delivery. Our letter follows.
Barrett, Goodfellow & Company"
The telegram was confirmed by a letter of the same tenor, dated May 2.3
Thereafter the correspondence, such as has been discovered, is directed
only to the Maerklin Bank, no doubt on the instructions of Harold
Antin, who was described by Tramiel as a public relations man doing
work for Commodore Business Machines in New York, introduced to
him by Morgan, and by Rennie Goodfellow as having been brought
into the office of Barrett, Goodfellow & Co. on one occasion by Morgan.
The Commission has no evidence as to how Harold Antin and Morgan
became acquainted, but it is clear that this arrangement was made by
Morgan, whoever made the initial introduction or the original suggestion
as to the device employed.
Four separate parcels, each of 20,000 shares of Commodore Busi-
ness Machines, were dispatched in this manner to Frankfurt on March
28, May 10, May 22 and June 24, according to the records of Barrett,
Goodfellow & Co., and specifically a handwritten summary prepared by
Amos entitled "Commodore certificates shipped to Germany."4 All of
these 80,000 shares came from the account of Mildred L. Morgan. There
is a further handwritten schedule,5 entitled "Commodore Business Ma-
chines 88-0005-4, Bankhaus Maerklin & Co., etc.", giving apparently
complete information as to shares received and delivered, and bought
and sold, containing a column in which the words "Mildred" and "Assoc"
appear, indicating derivation from the accounts of Mildred L. Morgan
or Associated Canadian Holdings, and from this document, in which
the opening entry is April 10 and the closing entry December 10, 1963,
it transpires that 80,000 shares were delivered, 53,300 sold and the
balance of 26,700 shares shown as transferred to "88-006-2 Can. dollar
account". The sale price is $3 per share in United States funds, and
remittance of funds arising from sales is shown as being made to Bar-
rett, Goodfellow & Co. for a total of $159,000 in that currency. On the
second page the disposal of the 26,700 shares is dealt with, the price
"Exhibit 2123.3.
8Exhibit 2123.4.
♦Exhibit 2123.5.
'Exhibit 2123.6.
363
Commodore Business Machines
per share being $3 in Canadian funds, and shows an additional 50,000
shares as being delivered from "Assoc" on December 3 by Barrett,
Goodfellow & Co. The last sale in Germany recorded on the schedule
is for August 3, 1964, and the last remittance to Barrett, Goodfellow &
Co. on October 5; all told, 130,000 were sold for $390,000, if one
disregards the foreign exchange factor. Until the transfer of May 27,
1963 funds received were credited to the account of Mildred L. Morgan
in respect of 32,100 shares sold, and thereafter remittances find their
way to Associated Canadian Holdings. Although some 98,000 shares
were delivered to Germany out of the account of this company, a state-
ment as at July 15, 1964 indicates that there was little reduction of the
total shares held, because it was buying on the Canadian Stock Ex-
change. At June 30, 1964 Associated Canadian Holdings showed the
original 215,600 shares of Commodore Business Machines which it had
received from the Morgan, Tramiel and Kapp families on incorporation
the year before, to which is attributed a value of $3.50 per share for a
total cost of $754,600. An additional 174,424 shares were shown as
having been acquired at prices ranging from $3.50 to $4.60 per share
for a total of $703,253.25. Its accumulation of some 400,000 shares
by the end of July, 1963 was the result of taking over the brokerage
accounts of Valley Farm and Enterprises and Dallas Holdings, already
referred to, and by June 30, 1964, according to Wagman's file,6 it still
held a round total of 390,000, after disposing of 90,000 odd in Ger-
many. Evidently Barrett, Goodfellow & Co., through their office man-
ager Ralph Carter, made a painstaking study of the ultimate destination
of the shares sold through the Maerklin Bank and Harold Antin, and
his findings appear in a hand-written schedule7 indicating that somewhat
over 70,000 shares, identified by comparison with the certificate num-
bers of those sent to Germany, were re-sold on the Canadian Stock
Exchange between May, 1963 and November, 1964. From July 1963 to
July, 1964 the price of Commodore Business Machines shares on that
exchange for board lots was always in excess of $4, with a high point
of about $4.75, and Associated Canadian Holdings must inevitably have
re-purchased a substantial number of these shares.
Unsworn testimony was given to the Commission on August 3,
1966 by Hans Guenter Hartenfeller, head of the securities section of
Bankhaus Maerklin, at the bank's premises in Frankfurt, in response to
questions put by Mr. Shepherd and in the presence of Mr. Derek Fraser,
Vice-Consul for Canada and Mr. Silvester von Herrmann of Burns Bros.
& Denton Limited, the Commission's adviser on financial matters in
Germany. Hartenfeller said that the transaction was first broached to
the bank in April, 1963 by Antin, who described himself as a public
•Exhibit 702.1.
'Exhibit 2123.7.
364
Chapter VIII
relations expert employed by Commodore Business Marchines; that
some of the shares were sold to the bank's regular clients but the bulk
of them to Swiss banks; and that these banks were in fact clients of
Antin, and sold them back on the Canadian Stock Exchange at prices
ranging from $5 to $7 per share. The bank deducted its expenses and
3% of any excess realized on sales over and above the $3 per share
remitted to Barrett, Goodfellow & Co.; the balance was placed at
Antin's disposal, and he shared in any profit made by the bank in dis-
posing of the shares to its own customers. Hartenfeller concluded by
saying that the bank had no direct dealings with Morgan, Tramiel or
Kapp, receiving all instructions from Barrett, Goodfellow & Co. and
Antin.8 Tramiel also denied having had any contact with the Maerklin
Bank. Antin informed the United States Securities and Exchange Com-
mission that he had worked as a public relations specialist for Commo-
dore Business Machines from early 1963, dealing with Jack Tramiel
and, in his absence, with his assistant, one Stanley Gould. A public
company called Trail Europe, promoted by Antin, was a tenant of the
Investitions Bank in Frankfurt; this had led him to approach this insti-
tution in the first place with the Commodore Business Machines pro-
posal, and it had been rejected. He was more successful with the
Maerklin Bank, and his version of the arrangement was that he had
merely received a finder's fee, and the bank disposed of the shares to
its own customers. He vehemently denied that he had received the pro-
ceeds of sales of stock, or had any control over their disposition.9 Such
a denial is difficult to accept in the face of the explicit instructions to
the Maerklin Bank by Barrett, Goodfellow & Co., and Hartenfeller's
version is to be preferred. The Maerklin Bank, now defunct, was a
smaller establishment than the Investitions Bank, and was housed in an
unpretentious second floor office where it conducted a business similar
to that of an investment dealer in this country. No doubt Antin's propo-
sition looked more inviting to it than to the more substantial Investi-
tions concern. The Commission has been unable to discover how Antin
disposed of his own portion of the proceeds of this operation, or if he
was under any obligation to share them with any other person. This
attempt to stimulate interest in the stock of Commodore Business Ma-
chines in Germany was evidently not an unqualified success, but Morgan,
as will be seen, was to return to the attack.
Incidence of Trading on Canadian Stock Exchange
An illustration of how slight was the interest of the general public
in the trading of Commodore Business Machines shares on the Canadian
•Commissioner's notes on conversations in Germany.
"Commission file: Securities and Exchange Commission — letter of Peter J. Adolph;
Division of Trading & Markets, October 28, 1965.
365
Commodore Business Machines
Stock Exchange, and how sedulously the market had to be cultivated, is
provided by a study made by Mr. Wolfman of the trading undertaken
by "insiders" between July, 1962 and June, 1965. This was prepared
from various accounts in brokerage houses, principally, of course, Bar-
rett, Goodfellow & Co. and Annett Partners, but including O'Brien &
Williams, John Frame & Co., Jenkin, Evans & Co., Moss, Lawson & Co.,
Goulding, Rose & Turner, Bache & Co. and Barclay & Crawford.1 The
insiders consist of individuals and companies, operated at their direction,
which are as follows: Dallas Holdings, Valley Farm and Enterprises
Limited, Associated Canadian Holdings Limited, C. P. Morgan and
Mildred Morgan together, C. P. Morgan No, 2 account, R. A. Good-
fellow, Commodore Business Machines Inc., Evermac Office Equipment
Company Limited, Hugo Oppenheim und Sohn Nachf . Berliner Privat-
bank, Hugo Oppenheimbank (Canada) Limited, Masco Construction
Company Limited, Mavety Film Delivery Limited, N.G.K. Investments
Limited, Tarmac Trust, Trans Commercial Acceptance Limited, Yarrum
Investments Limited, Cimcony Limited, J. A. Medland, Jack Tramiel, F.
B. Adair, Alan Christie, W. P. Gregory, Manfred and Estelle Kapp, C. G.
King and J. C. Laidlaw. Some of these names have not been encountered
so far in this report, but, since the examination of the trading covers the
whole period from the listing of Commodore Business Machines shares
to the collapse of Atlantic Acceptance, this is inevitable. Suffice it to
say at this point that the Hugo Oppenheim Bank and its Canadian sub-
sidiary company were, at all material times for the purpose of this trading,
under the direction of Jack Tramiel, as was Tarmac Trust, a Bahamian
nominee, and Trans Commercial Acceptance; Cimcony Limited was a
Bahamian company controlled by George H. Weinrott, a close associate
of C. P. Morgan; and F. B. Adair was president of Manhattan Sound
Corporation and Manhattan ^snrtTrrFWpst Corporation, in which Morgan
and his wife had a substantial interest and which were dependent upon
Atlantic loans, and was also a director with Weinrott of Analogue Con-
trols Inc., the affairs of which will be examined in some detail. The other
names of companies will be familiar as entirely under the control of C. P.
Morgan, W. L. Walton, Harry Wagman, Jack Tramiel or Manfred Kapp.
The result of this analysis is displayed below in a tabulation which
shows, by months, the trading volume on the Canadian Stock Exchange;
the trading volume on that exchange adjusted to value date so as to be
consistent with the information derived from brokers' records; the in-
siders' trading volume, according to these records being the larger of the
"sell" or "buy" side so as to avoid obvious duplication; finally the per-
centage of the total volume of trades involving the insiders listed above.
'Exhibits 2175-81.
4/k rtan /laffelA- UWf vSoand Corporation
Chapter VIII
COMMODORE BUSINESS MACHINES (CANADA) LIMITED
TRADING IN COMMON SHARES
Month
July 1962
August
September
October
November
December
January, 1963
February
March
April
May
June
July
August
September ....
October
November
December
January, 1964
February
March
April
May
June
July
August
September
October
November
December
January, 1965
February
March
April
May
June l-15th ..
June 15-3 Oth ..
Total Trading-
Inception to
June 30, 1965
Trading
Volume
per Canadian
Stock Exchange
7,200
64,675
28,526
24,595
13,480
3,585
142,061
10,965
14,550
20,850
15,543
57,625
12,775
40,223
6,433
3,853
15,880
17,405
7,335
223,437
20,650
20,108
8,805
30,720
20,850
4,555
11,135
6,455
7,065
79,961
118,641
129,993
458,938
94,478
73,679
81,327
35,834
55,627
31,919
119,188
492,052
1,316,488
Trading
Volume
per C.S.E.
Adjusted to
Value Date
3,000
57,625
37,000
26,261
14,590
3,550
142,026
6,685
9,565
29,050
16,343
57,025
13,275
39,233
7,023
4,353
14,880
9,695
16,315
223,442
19,880
18,908
7,600
27,825
25,550
5,755
9,535
7,955
6,300
69,166
120,031
130,833
449,338
89,400
76,685
84,477
41,900
56,898
141,382
490,742
1,305,548
'Insiders' " Trading
Volume per
Brokers' Accounts
(The larger of the
Sell or Buy Side)
Not Known
53,550
30,240
23,526
8,690
2,550
118,556
4,100
5,665
29,000
13,618
51,360
6,575
23,900
4,010
2,749
7,550
5,400
7,860
161,787
10,900
12,500
4,550
11,420
19,400
5,600
9,900*
6,600
3,900
33,855
43,801
63,912
226,338
37,770
30,263
38,659
20,899
30,611
59,053
217,255
723,936
%of
Volume
dealt in by
"Insiders"
92.9
81.7
89.6
59.6
71.8
83.5
6L3
59.2
99.8
83.3
90.1
49.5
60.9
57.1
63.2
50.7
55.7
48.2
41.8
443
55.5
♦Unexplained variance.
367
Commodore Business Machines
It will be observed that in the first six months after listing the insiders
are responsible for 83V^% of the trading on the Canadian Stock Ex-
change; in 1963, 72.4%, in 1964, 50.4% and to June 30, 1965,44.3%,
the average percentage over the whole period being 55.5% .
Particularly in the early period of trading, when these persons and
corporations dominated the market, it is not surprising that some appar-
ent "cross-trades" occurred. Those detected by Mr. Wolfman are listed
and in evidence,2 and examples which seem to be disingenuous are the
following:
No. of
Date Buyer Seller Shares
Aug. 29, 1962 Mildred Morgan Valley Farm 25,000
Sept. 24, 1962 MavetyFilm Valley Farm 2,000
Oct. 12, 1962 Valley Farm C.P.Morgan 10,000
March 27, 1963 Mildred Morgan R. A. Goodfellow 10,000
April 26, 1963 Evermac Office Equip. Dallas Holdings 9,200
May 27, 1963 Cimcony Limited Dallas Holdings 17,000
These trades were on the market, and were all effected by Barrett, Good-
fellow & Co. on both sides of the transaction, except that of April 26,
1963 between Evermac Office Equipment and Dallas Holdings which
was handled by John Frame & Co. Trading began on July 23, 1962 at
a price of $2.70 per share, but by the end of August there had been a
rise from $1.75 to a high of $4.25 from the exiguous volume of 64,000
shares traded, and thereafter until the end of the year the price fluctu-
ated between $4 and $4.50. The active trader during this period was
Valley Farm and Enterprises which bought 46,000 and sold 82,385
shares; the C. P. Morgan and Mildred Morgan accounts bought a total
of 25,000 shares during 1962 and sold 10,550; Dallas Holdings bought
17,000 and sold 730; J. A. Medland bought 10,000 off the market and
sold 15,550 on it. At the end of the year the positions of Evermac
Office Equipment, Mavety Film Delivery, Dallas Holdings, Valley Farm
and Morgan are substantially flat, these accounts having dealt in some-
thing like 90,000 shares.
During the year 1963 the insider group bought 153,360 shares and
sold 118,120, the prices varying between $4 and $4.75 per share. In
the first few months the bulk of the trading was carried on by the R. A.
Goodfellow special account in Barrett, Goodfellow & Co., but in March
its long position of 10,000 shares was transferred to that of Mildred
Morgan. In the second quarter, Dallas Holdings became the principal
trader, buying 43,000 shares and selling 35,000, but after June, 1963
discontinued trading entirely until after the Atlantic default. On incor-
poration in July, Associated Canadian Holdings took the lead, and at the
•Exhibit 2183.
368
Chapter VIII
end of the year had bought 30,228 and sold 14,930 shares on the Cana-
dian Stock Exchange. In July the R. A. Goodfellow special account
again became active, buying 1 2.600 shares and selling 2,900, and on July
25 liquidated its long position by transferring 10,000 shares to C. P.
Morgan for $44.1 25. ;i This transfer was off the exchange, and marks the
second occasion on which the long position of this account was trans-
ferred to one of Morgan's. In 1964 Associated Canadian Holdings pre-
served its substantial interest in the trading for the first three-quarters,
during which it bought 60,350 and sold only 7.930 shares. C. P. Morgan
began to trade heavily, and his No. 2 account was opened in October
1964, through which Commodore Business Machines shares were bought,
but not sold. Both Medland and King were substantial sellers in 1964.
But in October of this year there is a change. Associated Canadian
Holdings and Trans Commercial Acceptance ceased to trade, and the
Morgan accounts from October to December sold 1 15,300 shares, while
buying only 4.500. These sales do not include 20.000 shares sold off
the market to British Mortgage & Trust from the C. P. Morgan No. 2
account, in response to a display of interest by Wilfrid Gregory who was
unaware that he was taking these shares off Morgan's hands. During this
period of Morgan's sales the price of Commodore Business Machines
shares rose steadily, being $5.50 per share at the end of October, $6.75
at the end of November. $7.75 at the end of December, in January 1965,
$8.50. in February, $9, on March 31, $10.25 and in April. $10.50. In
May of 1965 the shares declined in price to $7.50. and on June 15 the
closing price was $7,125. On the following day, sucked downward by
the Atlantic crash, it reached $4.25, and by the end of the month $2.30.
During the last quarter of 1964 Morgan, on purchases and sales in and
out of his accounts on the exchange, was short 110.000 shares, and was
the only large trader.
Associated Canadian Holdings' Agreement with its Shareholders
This shortage of shares was offset by those available to the share-
holders of Associated Canadian Holdings. Its financial statement of June
30, 1964 includes a note to the balance sheet referring to an option
agreement of July 1, 1963 for the purchase of 215.600 shares at $3.50
per share, expiring June 30. 1965. and the books of the company record
the sale of that amount pursuant to option, off the market in December
1964. The number of shares, of course, is identical with those acquired
by Associated Canadian Holdings from the Morgan. Tramiel and Kapp
families at the beginning of its career, and in the files of Solonv
Singer dealing with the company1 there is an unsigned agreement, dated
July 1, 1963, between Associated Canadian Holdings, on the one hand.
"Exhibit 2184.
'Exhibit 823.
369
Commodore Business Machines
and Manfred Kapp, Estelle Kapp, Jack Tramiel, Helen Tramiel, Benja-
min Silberman, Regina Silberman, C. Powell Morgan, Mildred Morgan
and Harry Wagman on the other.2 All the copies of this agreement that
have been found conclude at the bottom of the last page, "In witness
whereof the parties hereto have executed this agreement as of the day
and year first above written." The final page, which would carry the
signatures, is missing in each case, but the gist of the agreement is that the
shareholders have not only the right, but an obligation to purchase at
$3.50 shares of Commodore Business Machines originally exchanged
for those of Associated Canadian Holdings. In its books Associated
Canadian Holdings treated the transaction of December 1964 as if ail
the shares of Commodore Business Machines had been transferred to
the shareholders, creating a debt by them to the former which was paid
in part.3 During December the company recorded sales under the
option, at $3.50 per share, of 28,500 to Harry Wagman, 36,577 to C. P.
Morgan and 15,000 shares to Mildred Morgan, for which it was paid,
and payments in respect of these shares were all that was credited against
the company's treatment of the entire 215,600 as being sold at that time.
Tramiel denied knowing anything about this agreement until after
the collapse of Atlantic, and this is consistent with the evidence that he
gave on his examination for discovery in the bankruptcy of Associated
Canadian Holdings on November 8, 1965.4 He swore emphatically that
he had never signed such an agreement, and said with some point that,
had he known about it, he would have definitely paid Associated Cana-
dian Holdings $3.50 per share and sold them for $10.50.5 No docu-
ments have been found to indicate that any of these shares were
transferred to Tramiel, Kapp or any members of their families. Both
Tramiel and Kapp maintained that they had never discussed with Mor-
gan the making of a market for Commodore Business Machines, or his
plans to create interest in the shares in Germany. Kapp testified that he
had noticed the European activity in the stock from perusing the transfer
sheets supplied by the Eastern Trust Company. He was prepared to
admit that some discussion must have occurred arising from the remark-
able increase in the value of the shares in 1964. He recalled particularly
an incident which occurred in 1963, when Morgan had asked him to
issue a cheque on behalf of Associated Canadian Holdings in the amount
of 4,971.77 to pay an invoice of Provincial Envelopes Limited, addressed
to the company,0 for some 120,000 envelopes which were mailed, with
some material inserted in them, under circumstances and to addressees
of which he knew nothing. Morgan had told him that it was not really
an affair of Associated Canadian Holdings, and that the money would
8Exhibit 823.4.
3Exhibit2165.
'Exhibit 4162.
"Evidence Volume 86.
•Exhibit 3645.
370
Chapter VIII
be repaid. He had subsequently turned the handling of the bank account
of Associated Canadian Holdings over to Harry Wagman, and had lost
interest in the matter, because, as he said, $5,000 was not much money
for a man like Morgan to handle, and Morgan had never at any time
taken him into his confidence. Further inquiries by the Commission indi-
cate that the enclosures were copies of, or extracts from the "News
Observer", a tout sheet published by David Rush.
However, there is evidence sufficient to convince me that Tramiel
and Kapp were by no means as much in the dark about the employment
of the shares of Commodore Business Machines held by Associated
Canadian Holdings as they would now like to assert. The letter from
Barrett, Goodfellow & Co. of July 25, referring to the transfer of 10,000
shares in Morgan's account for $44,1257 mentioned above, was endorsed
in Morgan's handwriting, "H.W. and M.K.: Please send cheque to B.G.
and pick up stock. C.P.M.". There is also in evidence a carbon copy of
a letter to Barrett, Goodfellow & Co., addressed to the attention of R. A.
Goodfellow and dated November 20, 1 964, reading as follows:
"This is your authority to transfer 40,000 shares of Commodore Busi-
ness Machines (Canada) Limited to the account of C. Powell Morgan.
Yours truly,
Associated Canadian Holdings Limited,
Per: H. Wagman — director".
Endorsed thereon, in what appears to be Wagman's handwriting, is
a note dated December 7, 1964 which reads: "This is your authority to
write same letter as above to B.G. & Co. for another 40,000 shares".
It is initialled "J.T." and "M.K.", without doubt in the handwriting of
Jack Tramiel and Manfred Kapp. This letter was entered as an exhibit
in the examinations for discovery of Tramiel, Kapp, Wagman and Mor-
gan in the bankruptcy of Associated Canadian Holdings, being obviously
of great interest to the trustee in view of the debt, recorded by the com-
pany, arising from the apparent failure of the Tramiels, Kapps and Silber-
mans to pay for the shares of Commodore Business Machines under the
terms of the option agreement. Tramiel said that he was prepared to
agree that these were his initials, but could not recall affixing them to the
minute on this letter, or anything about the transaction.8 Morgan identi-
fied the initials as being Tramiel's, and said that the resulting transfer of
80,000 shares was related to those of Harry Wagman and Mildred
Morgan, and that he was handling them with the consent of the owners.
Kapp said that the initials "M.K." appeared to be his and that, since he
was not a handwriting expert, he was not prepared to say that he had
signed them, and did not remember doing so.9 He agreed that there were
'Exhibit 2184.
"Exhibit 4162.
"Exhibit 4158.
371
Commodore Business Machines
transfers back and forth between Morgan and Associated Canadian
Holdings of the shares of Commodore Business Machines, but denied
authorizing them and said that, since he was not "operating" the company,
he had made no inquiry. When he was asked to sign something by
Morgan or Wagman he simply did so. Harry Wagman in his examina-
tion10 could not recall the transaction, but agreed that the evidence indi-
cated that the letter had been written, and said that the facilities of
Morgan's trading accounts were to be used by the shareholders exercising
the option, then in contemplation, to obtain money to pay for the shares
acquired from Associated Canadian Holdings. He gave his recollection
of the terms of the option agreement substantially in accordance with
the copy entered in evidence, and left little doubt that it had in fact been
executed. As to the exercise of the option by the parties to the agreement
other than himself and the Morgans, he felt that the books of Associ-
ated Canadian Holdings correctly reflected the intention to exercise it,
but that the company could not deliver the required shares because of
their being pledged against loans from various quarters.
The reluctance of Tramiel and Kapp to acquiesce in any interpre-
tation of the facts which would attribute knowledge of these transfers to
them, when the trustee of the estate of Associated Canadian Holdings
was relying on the mutilated option agreement and the records of the
company to recover from them the proceeds of their Commodore Busi-
ness Machines shares at a price of $3.50, then selling at slightly
over a dollar per share, is understandable if not excusable. The
disappearance of the last page of the option agreement, which must have
contained the signatures of the parties, was only too characteristic of the
atmosphere prevailing at the time, but is more difficult to explain. No
draftsman, in the normal course, would construct an agreement in which
the signatures of the parties alone were isolated on a separate page, un-
less perhaps by design. It is scarcely conceivable that any lawyer, how-
ever lacking in appreciation of the ethical standards required by his
profession, would have thought the device effective. If the final pages of
existing copies of the agreement were deliberately removed and destroyed,
such action, one would think, would be that of a layman, and an unin-
structed layman at that; since the only persons who could benefit from
the ineffectiveness of the written agreement in 1965 were the Tramiels,
Kapps and Silbermans it is more than likely that Tramiel, Kapp or their
agents were responsible for this crude deformity of the records. In any
event it seems clear that slightly over 80,000 shares belonging to Mor-
gan, his wife and Harry Wagman were sold in December 1964 by Asso-
ciated Canadian Holdings at a price of $3.50 per share under the terms
of the option agreement, and were transferred to the brokerage account
of C. P. Morgan with the knowledge and consent of Tramiel and Kapp.
"Exhibit 4167.
372
Chapter VIII
In February 1965 the books of Associated Canadian Holdings record
payment by Barrett, Goodfellow & Co. for 52,000 additional shares of
Commodore Business Machines, for the account of C. P. Morgan, by
cheque in the amount of $182,000. Morgan's short position in the shares
of Commodore Business Machines was thus more than sufficiently re-
stored.
Frank Kaftel and I.F.A.S.
Beginning in October 1964, and coincidental with the sharp rise in
price above the $4 to $4.50 level, and trading which, over a six months
period, would be substantially greater than anything which had gone
before, the company's stock was singled out for attention and support
in the pages of a bulletin published by the International Financial
Advisory Service in Luxembourg. The situation of this picturesque
Grand Duchy, on the borders of France, Germany, and Belgium, has for
long secured it a strategic and economic importance far beyond what
its geographical extent and population would, in the normal course, be
expected to command. Moreover, the authorities in Luxembourg have
appreciated the fact that the independence of a small country must
depend to a large extent upon its usefulness as such, the example of
Switzerland being always in mind. A liberal attitude towards the regu-
lation of commercial activity, particularly as it might affect the citizens
of other countries, has in the years since the Second World War made
Luxembourg, and to a lesser extent Liechtenstein, the favourite haunts
of business practitioners who have little to lose, and everything to gain,
by rusticating in these pleasant parts of the world, where fewer questions
are asked about their past records and future plans than by the authori-
ties in their countries of origin. Such a one was Frank Kaftel, an expatri-
ate from the United States, the land of his birth, and from Canada, the
land of his adoption, who since 1955 had been living in Paris, and had
conducted from Luxembourg the preparation and the distribution in
Continental countries of the bulletins of the International Financial
Advisory Service (I.F.A.S.). The appearance of Kaftel on the scene, and
his close association with C. P. Morgan during a critical period in his
affairs and that of Atlantic Acceptance, casts upon it that lurid and wav-
ering half-light generally associated with a coming storm.
Details of the career of Frank Kaftel have been obtained from a
number of sources, but principally from the evidence of Mr. N. W. H.
Cox, chief investigator for the Ontario Securities Commission, who testi-
fied on May 26, 1961,1 and from Kaftel himself, who was interviewed by
the Commission in Paris pursuant to an arrangement suggested by him
in March 1967, at which time a summary of his unsworn testimony was
reduced to writing by Mr. Shepherd, and signed by the witness in my
Evidence Volume 38.
373
Commodore Business Machines
presence.2 He was born in New York City in 1902 and moved to Cleve-
land, Ohio as a child. His father's surname was Kulunderino, otherwise
spelled Kulunderine, a name which was changed to Kaftel in Cleveland.
In 1919 he returned to New York where he was employed as an enter-
tainer using the stage name of Jack Castle. From 1924 until 1935 he
was engaged in the real estate and securities business in New York, and
in the latter year was indicted for being in possession of stolen bonds
obtained in a bank robbery, the charge being eventually dismissed. In
1937 he is to be found in London, selling, as it is said, "oil royalties",
but, after a brief sojourn in Paris, he was refused permission to re-enter
the United Kingdom because of the questionable activities of the com-
pany by which he was employed, and which was suspected of "share-
pushing". He made another attempt at entry in 1938, but was arrested
and charged with being an alien landed in England without permission.
To this he pleaded guilty and was sentenced to one month's imprison-
ment, and, upon his release, was deported to the United States. During
his stay in England he used the names "J. Simon", "Frank Carson",
"Frank Newman" and "James Sibley", and was associated with a certain
Jacob Pearlzweig, better known under the alias of Robert William
Liversidge, the appellant in the well-known case of Liver sidge v. Ander-
son? when the House of Lords, led by Viscount Simon L.C., decided
that the Home Secretary, Sir John Anderson, did not have to disclose his
reasons for detaining Liversidge under the war-time Regulation in 1 8B.
When Kaftel arrived in the United States he continued in the securi-
ties business, registered as a broker in Baltimore under the name of
Frank Kaftel & Co. In war-time, specifically in 1942, he left the
United States and came to Canada, being immediately accorded regis-
tration as a securities salesman, a status which lasted until January 1944
when he was suspended for failing to disclose a personal financial interest
in a firm registered as a broker-dealer. Subsequently it transpired that
disclosure had in fact been made, unknown to the Ontario Securities
Commission which restored his registration in September 1944. There-
after Kaftel, also using the name "Deverrier", followed his fortune as a
stock salesman until August 1945, when the registration lapsed with the
termination of his employment by Bowman, Stuart & Co. A more ambi-
tious application was made on November 20, 1946, when Kaftel sought
registration as a general broker under the name of Frank Kaftel & Co.
The application was refused on November 20 and again on December
17, and abandoned on January 30, 1947. Then, at the end of the year,
he applied for registration as a general broker under the name of
Standard Securities, and this application was refused at a plenary session
of the Ontario Securities Commission.
'Appendix G.
"(1942) A.C. 206.
374
Chapi er VII I
None the less, persistence was rewarded when Kaftel applied to
resume his old status as a securities salesman, and registration as such was
granted on June 2. 1948; on December 6 in the same year his applica-
tion to be granted registration as a broker-dealer under the name of
McGill Securities (Ontario) Limited was also successful. On this occa-
sion he gave an undertaking to the Securities Commission in writing that
he would not solicit sales in the United States, unless the particular issue
of securities which he sought to dispose of was qualified with the United
States Securities and Exchange Commission. Just over six months later,
on August 3, 1949, the chairman of the Securities Commission suspended
the registration for the following reasons: !
"'In the course of a current investigation it was disclosed that a print-
ing company extended credit in excess of $50,000.00 to a broker-dealer,
thus enabling this dealer to flood the mails outside of Ontario with pro-
motional literature. Mr. Frank Kaftel owns ninety percent of the capital
stock of the printing company in question. Kaftel also controls McGill
Securities (Ontario) Limited, registered with the Commission as a
broker-dealer. The business manager of the printing company is also a
director of the McGill Securities Company.
This is an obviously unhealthy situation that does not require further
discussion at this stage, as Mr. Kaftel will be afforded ample opportunity
to make representations if he applies to have the suspension of the regis-
tration of McGill Securities (Ontario) Limited lifted.
I might however point out that Mr. Kaftel has indirectly been instru-
mental in flooding the United States mails with literature, despite Iris
written undertaking not to make any offerings in the United States unless
the issue was duly qualified.
The registration of McGill Securities (Ontario) Limited will be sus-
pended until further notice."
Kaftel was thus shown to be a pioneer in the post-bellum technique of
using the mails to circumvent in the United States the regulations pub-
lished and enforced by the authorities there, a technique which, together
with that of using the long-distance telephone in a similar fashion, has
been employed to bilk credulous members of the public in the United
States, causing great and continuing concern to the Securities and Ex-
change Commission in Washington, and bad odour for Canadian busi-
ness in the American press. The Ontario Securities Commission, early in
this development, took measures to defeat this type of activity, and
Kaftel like so many others sought greener pastures in Western Canada.
particularly in the Province of Alberta, where he resided after an inves-
tigation of his promotional activities in the case oi a company known as
New Continental Oils Limited in 1952. At this time he failed to resp
to a subpoena issued by a committee of the Legislative Assembly of
Ontario investigating crime, and it was from Alberta that he promoted
'Ontario Securities Commission Bulletin, August 1949.
375
Commodore Business Machines
Pontiac Petroleums Limited, a stock manipulation which was the subject
of an investigation by the Ontario Securities Commission and resulted
in the cancellation of the registration of the Toronto brokerage firm of
Rittenhouse & Co.
At some time during Kaftel's stay in Canada — according to his own
account in 1 949 — he became a Canadian citizen and, as a badge of his
new allegiance, created a large indebtedness to the State in respect of
unpaid income tax. This was his own stated reason for not appearing
before this Commission in Toronto, and may have, among other things,
induced him to leave the country and live in France. His venture in
Luxembourg, the International Financial Advisory Service, was incor-
porated there on February 22, 1951, but did not in 1964 record his
name amongst those of its officers and directors; but both his own state-
ment and the records of the Ontario Securities Commission, compiled
from many sources, agree that at this time he was in full control of its
affairs. The bulletins were issued in the French language, although the
name of the enterprise was English, and generally the tone of their
contents indicates superior wisdom derived from past experience of the
American and Canadian stockmarkets which, for the price of the annual
subscription, slightly over $60 in United States funds, its author was
willing to impart to his subscribers. Up until the time now under examin-
ation I.F.A.S. had touted the shares of John Northway & Sons Limited
(a promotion of David Rush), Sharpe Instruments of Canada Limited,
National Controls (Canada) Limited, All-Canada Bowling Limited,
Private Brand Drugs Limited, Delta Electronics Limited, Western
Helium Limited and Lucayan Beach Hotel Company Limited. It does
not, of course, follow that, because the I.F.A.S. bulletin recommended
the purchase of shares of these companies, they were connected with
Kaftel. There are, however, connections, apart from that with David
Rush who will be mentioned hereafter. Kaftel told the Commission that
he first heard of C. P. Morgan through Earl Glick of Delta Electronics,
which had borrowed Atlantic money, and Allen Manus, of Lucayan
Beach Hotel, claimed to have suggested to Morgan that he should enlist
Kaftel's aid in stimulating European interest in the shares of Commodore
Business Machines.5
There seems to be little doubt that Manus was the first link between
Morgan and Kaftel. Before going to New York with his brother Cecil
in 1948 Allen Manus had been a salesman with two brokerage firms in
Toronto from his twentieth year in 1944, and all his background indicates
that he was, and is knowledgeable about the half-world of the securities
business and its clandestine operations. According to Kaftel, he had
known Manus for some time prior to June or July 1964 when the latter
came to see him at the Hotel Majestic in Cannes in an attempt to find a
•Exhibit 4068.
376
Chapter VIII
buyer for some shares of Lucayan Beach Hotel Company Limited. Kaftel
did not recall the number of shares involved or the price per share, but
said that he did dispose of them as required, and was to receive $50,000
as a fee. Payment was made in the form of a cheque for $20,000 deliv-
ered to Jules Schoen, a long-time adherent of and "runner" for Kaftel,
presumably in the Bahamas. The cheque was not met when presented at
the bank, and Kaftel told Schoen to get him cash, dealing in which was
his invariable habit. Subsequently, Kaftel said, he got $20,000 in cash
but not the balance promised. According to Rennie Goodfellow, Morgan
stepped into the breach on this occasion and provided Manus with the
money for this payment, although, as Goodfellow recalled, the amount
was $30,000, at least as provided by Morgan.6 In particular Kaftel
denied receiving a cheque in the amount of $45,000, dated June 26,
1964, made payable to "F. Kulunderino", drawn on the Bank of Nova
Scotia at Toronto by Daylite of Grand Bahama Limited,7 and denied
that the endorsement thereon was in his handwriting. This cheque was
deposited to the credit of Galco Trust Reg., and other similar cheques
will be referred to. At the time of the meeting in Cannes Manus had
not, as Kaftel recalled, mentioned the name of C. P. Morgan, and it was
not until October 1964 that Schoen had written to him to say that he
was bringing Morgan over to Paris to discuss a deal for the sale of shares
in Europe. The meeting had occurred in the Hotel Georges V, Kaftel,
Schoen. Morgan, Goodfellow and Tramiel all being present.
Morgan's Visits to Kaftel in Paris
This first meeting between Morgan and Kaftel constituted the sec-
ond and more determined attempt to create a market for Commodore
Business Machines shares, sustained by European investors. Morgan's
expenses were paid for by Barrett, Goodfellow & Co., a circumstance
which Goodfellow described as a public relations gesture, because of his
firm's association with Morgan, and the revenue which it was getting
and expected to get from his trading. One of the peculiarities of Good-
fellow's evidence in connection with this meeting and with later ex-
peditions to the same address, was that nothing about trading or the
disposition of shares or profits was ever discussed in his presence. Only
generalities, the prospects of the companies and so forth were dealt with
by Morgan and Kaftel, after which Goodfellow went for a walk as a
sightseer in Paris, or back to his hotel to sleep, leaving the principal
actors to confer alone. On four separate occasions Goodfellow accom-
panied Morgan to Paris and his firm paid their expenses, but at no time,
according to his sworn evidence, was he ever told the purpose of the
visits, or the details of any arrangement made between Morgan and
"Evidence Volume 46.
'Exhibit 3841.1.
377
Commodore Business Machines
Kaftel. During the course of eight long trans-Atlantic flights, said Good-
fellow, Morgan had been largely silent and often asleep. It is true that
Morgan did not give his confidence easily, but it is impossible to believe
that Goodfellow, with his expert knowledge of stock market operations,
should have played no part in the arrangements with Kaftel, and the
patent untruthfulness of his evidence on this aspect of his relationship
with Morgan must vitiate all of it, except where there is independent cor-
roboration of what he said. Kaftel's recollection was that he played an
active part in the conversations, particularly those dealing with shares
of Analogue Controls. Goodfellow said that, although he had not met
Kaftel before, he was familiar with his record, particularly in connection
with the Pontiac Petroleums promotion; there can be little doubt that he
realized that he was playing a dangerous game for a member of the
Toronto Stock Exchange, and in his evidence before the Commission
was obstinately determined to deny any knowledge of what had been
afoot. I conclude, therefore, that Goodfellow was present on October 3 1 ,
1964 for the same reason that he was present at three subsequent meet-
ings: his knowledge and advice were vital to the transaction. Information
as to the manufacturing and sales prospects of Commodore Business
Machines was supplied at this meeting by Jack Tramiel, who was sum-
moned by Morgan from Berlin where he had been visiting the show-
piece of the Commodore Business Machines collection, the Willy Feiler
plant, purchased by the Canadian company for $1,000,000 some sixteen
months before. In the course of his evidence Goodfellow described
Jules Schoen as a "courier" and, when pressed by counsel and myself
as to why he should use this term, he was unable to explain this revela-
tion of his knowledge of the mechanics of Kaftel's business. Kaftel and
Goodfellow are, however, at one about the preliminaries. Morgan
showed Kaftel the list of the lenders of money to Atlantic Acceptance,
and the latter was impressed with what Goodfellow described as
Morgan's "credentials".
Kaftel said that all three of Morgan, Tramiel and Goodfellow related
their experience the year before with the Maerklin Bank in Frankfurt
and Harold Antin, and how they had managed to sell about 180,000
shares in Europe, although most of them had been repurchased on the
Canadian Stock Exchange. Still a substantial number of shares were in
European hands. The only evidence as to the terms of the agreement
which must have been made on this occasion was supplied by Kaftel
himself; Morgan in his evidence referred to two meetings, and not more,
only in connection with the shares of Analogue Controls. According to
Kaftel, he was to be paid $25,000 per week for recommending the pur-
chase of Commodore Business Machines shares in I.F.A.S. bulletins,
and he was to cause an average of 35,000 shares per week to be sold.
Shortly after this arrangement was completed he went to Berlin and to
Offenburg to inspect the Willy Feiler plants, and, like every visitor to
378
Chapter VIII
these establishments, he was most favourably impressed, particularly
with the adding machine and the prototype of the electric portable type-
writer. He mentioned being shown a machine sold to International
Business Machines, which produced a profit at a price of $3,000 per
unit, selling in the United States for $30,000, and seeing orders for
200,000 of the electric typewriters. He formed the impression that Com-
modore Business Machines stock, on the basis of ownership of this
profitable and well-run subsidiary, was worth $20 per share.1
The Nature of Kaftel's Services
It is now time to notice the nature of Kaftel's services, for which
he admitted getting at least six payments of $25,000, by looking at the
I.F.A.S. bulletins to the extent that they refer to Commodore Business
Machines and its securities. Both the original documents1 and their
English versions, made by the translation section of the Department of
the Provincial Secretary & Citizenship of Ontario2 were put in evidence
by Mr. Wolfman. The first reference to Commodore Business Machines,
which is not named, appeared in the bulletin dated October 15, 1964
and indicates that Kaftel did not wait until the meeting of October 31
to lay the foundation of his subsequent services, and had already issued
the following tantalizing invitation:
"We have information regarding a company admitted to the Official
Quotation of a Stock Exchange, having plants in EUROPE, in the
U.S.A. in CANADA, whose products are sold in 55 countries COVER-
INGTHE WHOLE OF EUROPE.
Here is a chance for you to obtain information, GRATIS, on this com-
pany whose future is assured. It has quintupled its turnover since 1959.
Here are some reasons why you should get this information :
1 ) It is an international company.
2) ITS EUROPEAN BRANCH IS IN FULL EVOLUTION.
3 ) It is a company with diversified activities.
4) It has excellent management.
5) IT IS ADMITTED TO THE OFFICIAL QUOTATION OF A
STOCK EXCHANGE AND MAY BE BOUGHT OR SOLD AT
EACH SESSION.
6) Its present rate is within the range of everybody.
CABLE OR TELEPHONE US FOR THIS INFORMATION IM-
MEDIATELY, OR COMPLETE THE ATTACHED FORM AND
MAIL IT TO US BY RETURN."
1 Appendix G.
'Exhibit 2187.
'Exhibit 2188.
379
Commodore Business Machines
The attached form, expressing interest in receiving the promised infor-
mation, was addressed to I.F.A.S. — 52 route d'Esch, Luxembourg and
it appears that those subscribers who completed and returned it received
advance information on what was conveyed to subscribers as a whole
in the bulletin of December 1, 1964:
"SELECTION IS THE OPERATIVE WORD
FOR TO-DAY'S MARKETS . . . HERE IS ONE . . .
DO YOU KNOW THE HISTORY OF INTERNATIONAL BUSI-
NESS MACHINES, BETTER KNOWN AS I.B.M.?
It is terrific, started very small, was traded as low as $3, reached a
maximum of $607 and has been split 8 times since its foundation, and is
admitted to the Quotation of the N.Y.S.E. Can you imagine how much
money you would have if you had bought 1000 shares at $3.-? I.B.M. is
history, since this international company is known all over the world.
NOW, we present to you a young world company, COMMODORE
BUSINESS MACHINES, C.B.M., whose expansion has been enormous
since its founding a few years ago.
Since its creation, this company has extended the market for some
of its products which are sensational. It also manufactures components
for some of the giants of this industry. We give below its progress:
1) Although COMMODORE was formed in 1958, one of its sub-
sidiaries has been in existence for more than 50 years.
2) Since its creation, the following companies have formed a part of
this international company:
In GERMANY: WILLY FEILER ZAEHL-UND RECHEN-
WERKE GmbH, with 2 plants in West Berlin and Offenburg. The
new plant in Offenburg is equipped for large-scale production.
75,000 portable electric typewriters are assured annually.
In IRELAND: Commodore Industries Ltd., in Shannon.
In the U.S.A.: Commodore Drycopy, Phil., Pa. . . .
Commodore Business Machines Inc., N.Y.
In CANADA: Associated Tool & Mfg. Co. Ltd., . . . Shelburne Tool
Co. Ltd. . . . Belpree Mfg. Ltd. . . . Commodore
Drycopy Ltd. . . . Humber Typewriters & Business
Equipment Ltd.
3) This company has quintupled its turnover since 1959, and will in-
crease its production annually. Its products are sold in 55 countries.
4) At present, it is placing on the market a revolutionary type of port-
able electric typewriter. Management states: "Orders for 250,000
machines have been booked. First deliveries expected at the end of
May.
380
Chapter VIII
5) A stock which can be bought and sold at any moment, whatever the
market tendency, BECAUSE ITS EXCHANGES ARE SUS-
TAINED.
6) Its management and directors are esteemed and dynamic.
7) IN YOUR PORTFOLIO, THIS STOCK COULD PROVE TO BE
IN THE FUTURE ONE OF YOUR BEST INVESTMENTS.
8) A FREE ALLOTMENT HAS JUST BEEN DECLARED, GIVING
TO ALL SHAREHOLDERS REGISTERED PRIOR TO THE
END OF 1964 ONE FREE SHARE FOR EVERY 20 HELD.
THIS REPRESENTS A 5% BONUS FREE OF TAX, PAYABLE
ON JANUARY 31st 1965.
This speculative Industrial may follow the course of the great world
office-equipment companies. Since its shares are at present within your
reach, IT IS IN YOUR INTEREST TO INCLUDE SOME IN YOUR
PORTFOLIO.
BUY TO-DAY ON THE CANADIAN STOCK EXCHANGE,
MONTREAL, CANADA.
COMMODORE BUSINESS MACHINES.
Price: about 6Vi Canadian dollars.
PLACE YOUR ORDERS IMMEDIATELY WITH YOUR BANK
OR YOUR BROKER.
IN OUR OPINION THESE SHARES WILL BE TRADED AT $20
EACH BY THE END OF 1965. THIS WILL BE JUSTIFIED BY
THE PROFITS MADE BY THE COMPANY."
The next weekly bulletin, that of December 8, contained the following:
"Our last week's edition was devoted to a company called:
COMMODORE BUSINESS MACHINES.
We have before us letters in which certain "brokers" and banks have
given INCOMPLETE INFORMATION to our subscribers. We believe
that this was NOT INTENTIONAL and we do not hold them respon-
sible for it, because they get their information SECOND HAND. They
are therefore going to be embarrassed by the exact picture which will
appear.
THE THING TO KNOW NOW IS WHY GET INFORMATION
SECOND HAND? If you are a shareholder, REGISTER your shares
to YOUR NAME AND ADDRESS and you will receive reports on the
progress of the company directlv from its headquarters. We believe that
VERY INTERESTING NEWS is going to appear.
381
Commodore Business Machines
WE HAVE BEFORE US A REPORT DATED NOVEMBER 24th
WHICH WE CONSIDER EXCEPTIONAL NEWS. Write to us to
get it. We will send a photostat of the original with a translation, and
with our comments separately.
Did you buy COMMODORE last week? . . .
If not, DO IT TO-DAY . . .
BUY at your bank or broker . . .
Quoted on the Montreal Stock Exchange.3
Price: $ Can. 6% approx."
On December 15, in the course of a year-end salutation, the following
appeared:
"During the past two weeks we have spoken of
COMMODORE BUSINESS MACHINES (C.B.M.).
Once more we wish to bring to your attention this company which, in
our opinion has GREAT GROWTH AND PROFIT POSSIBILITIES.
We understand that a new report of the STATE OF THE TREASURY
will appear during February, to give the shareholders an EXACT
PICTURE of the company's ASSETS, since MILLIONS OF DOLLARS
of material and real estate figure for ZERO in the books. A new evalua-
tion would bring out the truth.
We are informed that the company has perfected a NEW CALCU-
LATING MACHINE which will retail at between $2000 and $3000.
THIS WILL ALLOW SMALL COMPANIES TO HAVE ONE. This
inexpensive calculating machine will sell at a price lower than that of
other current calculating machines. This, in addition to the new and
revolutionary PORTABLE ELECTRIC TYPEWRITER and other
products under study, means that COMMODORE should be in your
PORTFOLIO.
One knows that "Something new draws the crowds". As regards the
COMPETITION (some bankers have pointed out that certain large
companies of this kind could not make ends meet), we believe there is
room for everybody. It is COMPETITION that stimulates the world.
After all, a GOOD SPECULATION IS WORTH A TRIAL, and
COMMODORE is a good SPECULATION. It knows how to PRO-
DUCE GOOD PRODUCTS AT LOW PRICES.
Remember that LIFE IS A GAME. Let us not allow to-day's oppor-
tunity to slip by ... . Life is a good speculation.
We have been inundated with requests for the report of November
24th on COMMODORE. We must ask you to forgive us for failing to
forward it before our reopening in January.
'Here and on pp. 383-4 the original version reads "BOURSE CANADIENNE, Mont-
real". The error is that of the translator — not one that Kaftel would be likely to make.
382
Chapter VIII
THE BEST NEW YEAR'S GIFT YOU CAN GIVE YOURSELF IS:
COMMODORE BUSINESS MACHINES (C.B.M.)
Quoted on the Canadian Stock Exchange,
Montreal
Price: $Can. 7.
PLACE YOUR ORDER WITH YOUR BANK OR YOUR BROKER.
MERRY CHRISTMAS AND HAPPY NEW YEAR.
NEXT BULLETIN on January 12, 1965."
Nothing else was said until the bulletin of February 23, when the follow-
ing appeared in a box on page 11 of that issue:
"Latest reports on C.B.M.— COMMODORE BUSINESS MACHINES
show for the first semester of the year, as of December 31st, a 38%
SALES INCREASE. PROFITS during this period INCREASED by
62.1% And this does NOT INCLUDE the PORTABLE ELEC-
TRIC TYPEWRITER and the COMPUTER. First deliveries of the
portable electric typewriter are to be in May, and from here on to the
end of the year, the PROFITS should be enough to raise C.B.M. to our
FORECAST LEVEL of $20.
Yesterday C.B.M., quoted on the Montreal Stock Exchange, closed at
$9.-."
The next few bulletins deal with Analogue Controls Inc. and will be
referred to in detail later. On May 11, 1965 there is a brief notice:
"COMMODORE BUSINESS MACHINES
Our Management attended the Hannover Fair and talked with the
Vice-President of the company who showed him the PORTABLE
ELECTRIC TYPEWRITER which is very REMARKABLE.
EXCELLENT NEWS AHEAD, C.B.M. HAVING ACQUIRED A
CERTAIN COMPANY FOR MILLIONS OF DOLLARS CASH.
C.B.M. CLOSED YESTERDAY AT $10V6 ON THE MONTREAL
STOCK EXCHANGE. MAINTAIN AND INCREASE YOUR POSI-
TION."
More on this subject was supplied on May 1 8 :
"ATTENTION COMMODORE BUSINESS MACHINE SHARE"-
HOLDERS.
SOMETHING NEW about this company. ... A RETAIL BUSINESS
. . . C.B.M. is about to absorb a chain of STATIONERY RETAIL
STORES with shops in all large Canadian cities, the name of which is:
383
Commodore Business Machines
WILLSON STATIONERS & ENVELOPES Ltd.
This company is the LARGEST SUPPLIER OF OFFICE EQUIP-
MENT in this country, with a turnover of MORE THAN $7 MILLIONS,
established since 1929, and it sells dozens of articles under different
brand names.
ONE HUNDRED THOUSAND DOLLARS has been paid, and
C.B.M. has a firm commitment for 75Vi% of the shares and will un-
doubtedly have from 90 to 95% on the due date. The price paid was
$100 per share plus $4 dividend, or $104 per share. The issue of
this company, quoted on the Toronto Stock Exchange, is 50,000
shares.
FINANCING IS FULLY ASSURED.
The PORTABLE ELECTRIC TYPEWRITER will shortly appear all
over the world. As the turnover increases, the C.B.M. INCOME will be
TERRIFIC.
Profits are at present excellent and the NEW REPORT to be pub-
lished will show an increase of 80% in comparison with the preceding
year.
A photograph of the PORTABLE ELECTRIC TYPEWRITER is
attached. — This company also manufactures hundreds of other products.
Yesterday's dip was the result of PROFIT TAKING. At the present
price
COMMODORE BUSINESS MACHINES should be BOUGHT.
Quoted on the Montreal Stock Exchange at %9XA ."
The bulletin of May 25 and the subsequent quotations carry the story
considerably ahead of what is now being considered and deal with a
more sombre atmosphere in the story of Commodore Business Machines,
but it may be quoted for convenience beside its predecessors.
"CRITICISM IS HEALTHY AND WE WELCOME IT. BUT the
statements made by those DEPRIVED OF KNOWLEDGE are RIDICU-
LOUS. For this reason, we are devoting our Bulletin to answering
certain questions and to informing our subscribers as to what is TRUE
and what is in the realm of FANTASY. Or again as to the PURPOSE
hidden behind certain statements made by certain FINANCIAL
JOURNALS and FINANCIAL ESTABLISHMENTS.
A BEARISH tendency is often directed against a security for LUCRA-
TIVE purposes. This, believe us, is the case with the FANTASTIC,
RIDICULOUS, and LYING statements which are being spread.
We remember the uproar which resulted from a recommendation on
TEXAS GULF SULPHUR and many other companies. Unfortunately
for them, the people who condemned these recommendations were obliged
to admit that these shares DOUBLED and sometimes TRIPLED their
prices in a short time (example: COMSAT).
384
Chapter \ III
At tins moment, a certain financial journal is proclaiming: "Sell your
C.B.M. . . ."'. Attached to this Bulletin is a photostat of a letter addressed
to all COMMODORE BUSINESS MACHINE SHAREHOLDERS
registered by name. It is EDIFYING and exceeds the statements which
we have published in our Bulletin of last week. (If you would like an
exact translation, write or ring us.)
The present C.B.M. cannot be compared with the C.B.M. recom-
mended in 1964 by the above-mentioned financial journal. TO-DAY
C.B.M. IS MUCH MORE FLOURISHING, IS RICHER, and its
TURNOVER is about FIVE TIMES HIGHER than at the time when
it was first recommended in Europe."
Then the bulletin concludes with the following exhortation:
"WE HAVE FREQUENTLY STATED THAT WE ARE NOT
INFALLIBLE, BUT AS REGARDS COMMODORE BUSINESS
MACHINES AND ANALOGUE CONTROLS WE STILL BELIEVE
THAT AT THE PRESENT PRICE THESE STOCKS SHOULD BE
KEPT OR BOUGHT. DO THIS THROUGH YOUR BANK OR
BROKER."
Again, in the issue of June 8, 1965, is the following note:
"COMMODORE BUSINESS MACHINES (C.B.M.)
The company is going to publish THREE GOOD RESULTS4 from
the point of view of PROFITS for 1964, after deduction of taxes. The
balance sheet was closed on June 30th 1965. This DOES NOT INCLUDE
the portable electric typewriter, nor the recent acquisition of WILLSON
when completed.
C.B.M. closed yesterday at $7% and should be BOUGHT."
And finally on June 15, 1965 under the heading "American Markets".
Commodore Business Machines and Analogue Controls have pride of
place:
"Remember May 28th 1962, when DOW JONES dropped 35 points
in one session and dropped 220 points from its annual maximum. It still
came back again and continued to rise. It has been PROVED that in
time, whatever happens, EVERYTHING IS RESTORED TO ORDER.
And remember that existing conditions are BETTER and SAFER. SO
DO NOT GET EXCITED. There are still main interesting stocks to
buy to-day in spite of the present market.
C.B.M.: ($1Vs-1Va) . . . ANALOGUE CONTROLS: %3V4-3Vi"
'An incorrect translation of "tics bon rcsultats".
385
Commodore Business Machines
Information Available to Shareholders
It is important to see exactly what information was available to
shareholders to support the statements in these bulletins, and generally
to sustain a rapidly rising price for Commodore Business Machines
shares. The president, Jack Tramiel, on March 5, 1965 sent a letter to
the shareholders, accompanied by a brief and unaudited consolidated
statement for the six months ending December 31, 1964, a proceeding
without precedent.1
"Dear Shareholder:
Following a highly successful fiscal year ending June 30, 1964, in
which sales rose 24% to a new high of $7,634,469 and net profit rose
31% to $376,575, your company has continued to make substantial
gains for the six month period ending December 31, 1964 — the first six
months of our current fiscal year.
We are happy to report that consolidated (unaudited) sales for that
period reached $5.2 million compared to $3.8 million for the com-
parable period in the previous fiscal year, a gain of 38%. Net profits
were up by 62.1% to $277,830, increasing the earnings per share to
300.
With general economies healthy and vigorous, and likely to remain
so, we believe our excellent growth record will maintain its pace for the
rest of our fiscal year and for the foreseeable future.
Justifying our policy of continuous research and development of new
products, we are pleased to report that the new portable electric type-
writer developed by our West Germany subsidiary will be available in
full quantity late this year for the Canadian and U.S. markets. We are
now starting to market our compact electric adding machine.
Production is well up at our German plant, and we are now employing
875 people there. A subsidiary acquired last year, Commodore Indus-
tries Limited, Shannon Airport, Ireland, is now producing adding
machines largely for the Commonwealth market, freeing our West
German production for sales mainly to the U.S. market. A hand adding
machine is also being manufactured there for the National Cash Register
Co. for exclusive sale in England. The added plant capacity in Ireland
and completion of new facilities in Offenburg, West Germany, is enabling
us to keep up with the heavy demand for our products.
In Canada, Belpree Co., another subsidiary acquired last year, is now
in production in a recently completed 30,000 square foot addition to our
Scarborough, Metro Toronto, plant. Belpree is manufacturing a line of
steel office cabinets and desks which will sell in the low to medium price
range in the Canadian and U.S. markets. As you know, we are already
marketing steel office furniture in both Canada and the U.S. By manu-
facturing our own products, and taking advantage of the discount on the
Canadian dollar, we believe that we can be very competitive in the U.S.,
and continue to supply major department store outlets there and in
Canada. We fully expect that greater volume and profits will be a direct
Exhibit 2189.
386
Chapter VIII
result of our decision to manufacture steel office furniture in the Scar-
borough plant.
Associated Tool & Manufacturing Co. was also acquired last year as
part of our policy of continued expansion and is highly regarded in
Canada as a manufacturer and supplier of high quality precision tools
and dies for industry. Customers include some of the largest manu-
facturers in Canada.
Earlier this month, Commodore sold privately 100,000 cumulative,
redeemable, convertible preferred shares, Series A, with a par value of
$10.00 each, carrying a fixed cumulative dividend of 6%.
The company also issued and sold privately $ 1 million of subordinated
notes, non-convertible, at 634 % . These proceeds will be used to elim-
inate the company's short term indebtedness. Funds from the sale of
the Series A preferred shares will be used primarily to establish a manu-
facturing facility in the U.S. and to manufacture the new portable elec-
tric typewriter. Possible locations for our U.S. manufacturing operation
are now under active investigation.
I view the prospects for the remainder of our fiscal year — as well as
the long-term prospects — with complete confidence. I believe that our
policy of expansion, our constant search for new and improved products,
plus a steady growth in our dealerships — now numbering over 2,500
around the world — augurs well for the healthy growth of our still youth-
ful company.
New developments will continue to occur in the coming months and
as they do, all shareholders will be kept fully informed.
I wish at this time to express my thanks for your continued confidence
in Commodore.
Sincerely,
JACK TRAMIEL
President"
March 5, 1965
Appended to this letter, which is in the form of a coloured folder illus-
trating Commodore products, and setting out the names of the directors
and of subsidiary companies, is the following table giving comparative
figures for the first half of the fiscal years 1961 to 1964:
1964 1963 1962 1961
Sales $5,257,556 $3,809,945 $2,202,373 $1,597,408
Profit before Taxes 478,508 305,557 145,264 60,680
Net Profit 277,830 171,350 89,069 51,580
Earning per Common
Share 30^ 20? 11*? 6*
Common Shares outstand-
ing at end of period 912,625 823,800 816,000
These figures do not take into account any provision for payment of
dividends on the preference shares which are described as having been
issued "earlier this month", referring of course to December, 1964. but
387
Commodore Business Machines
this is a trifling source of misunderstanding, compared to what must be
judged to be the case in the light of the results reported for the whole
fiscal year ending June 30, 1965.1 At the year-end, in spite of the inclu-
sion of the sales and profits of the Willy Feiler division, the net loss was
$1,051,714 on a consolidated basis. A serious mis-statement is that which
refers to the employment of funds derived from the sale of the Series
"A" preference shares, which in fact were also used to reduce the in-
debtedness to Commodore Sales Acceptance. Opposite is Mr. Wolfman's
analysis of the consolidated loss of Commodore Business Machines for
the year ended June 30, 1965, by individual companies, and it will be
noted that, had it not been for the healthy position of Willy Feiler, the
consolidated net loss after tax would have been $1,585,180, taking into
account an income tax refund estimated to be $297,616, based upon
the questionable practice of charging all the "non-recurring" items of
loss against the operations for the year, even though they were attribut-
able in most cases to operations of previous years.2
Some additional observations should be made about this analysis in
that it excludes from the consolidation, in accordance with the company's
decision, the results of the operations of International Typewriter Co.
Inc., an American subsidiary only 50% -owned by Commodore Business
Machines, and those of Commodore Industries Limited, an Irish com-
pany which, as will be seen, had been compelled to purchase a large
amount of inventory and manufacturing rights from Commodore Busi-
ness Machines Inc., thus improving the sales position of the latter, and
leaving the Irish company in a situation which will be referred to again.
Furthermore, there occur in this list the names of two companies, Hum-
ber Typewriters & Business Equipment Limited and Pearlsound Dis-
tributors Limited, the acquisition of which will also be dealt with.
Enough, however, has perhaps been said to judge the good faith of the
president of the company, writing as he did to the shareholders on March
5. 1965, at a time when he and his associates were making their con-
siderable holdings of shares available to the public in a rising market.
Insider Trading Results: October 1964-May 1965
In this connection it is appropriate to examine the individual trad-
ing accounts of the insiders to see how they fared in these halcyon days
of stock market activity in the shares of their company. From October
15, 1964 to the end of May, 1965 some 650,000 shares of Commodore
Business Machines were traded on the Canadian Stock Exchange, more,
as has been said, than the whole volume of trading from July 1962,
when the stock was listed, to the end of September 1964. The records
of Barrett, Goodfellow & Co. indicate that, during this later period of
•Exhibit 2134.
■Exhibit 2190.
388
Chapter VIII
COMMODORE BUSINESS MACHINES (CANADA) LIMITED
and Subsidiaries
ANALYSIS OF CONSOLIDATED LOSS BY SUBSIDIARY
COMPANIES
for the year ended June 30, 1965
Operating
Profit "Non- Net Profit
or (Loss) Recurring" or (Loss)
Before Tax Items After Tax
Commodore Business Machines
(Canada) Limited ($ 491,962) ($213,776) ($ 692,433)
Commodore Business Machines
Inc (572,903) (15,717) (418,567)
Commodore Drycopy Inc (162,315) (438,904) (489,828)
Commodore Drycopy Limited .... (3,720) — (2,530)
Humber Typewriters & Business
Equipment Limited (3.930) (4,416)
Associated Tool & Mfg. Co.
Limited 11,694 (7,766) 5,992
Shelburne Tool Co. Limited (70) (70)
Belpree Company Limited (1,724) (1,623)
Pearlsound Distributors Limited.. 18,295 18,295
($1,206,635) ($676,163)
Adjustment (33,890) 33,890
Less: Total Tax Refund
—Estimated 297,617
(942,908) (642,273) (1,585,180)
Add: Administrative Expense
Adjustment— Willy Feiler (29,209)
Less: Willy Feiler— 533,467
Profits after tax 562,677 j
Net Losses ($ 409,440) ($642,273) ($1,051,713)
389
Commodore Business Machines
almost seven months, the aggregate sum of $1,037,313 was paid out to
C. P. Morgan, of which $657,813 was paid either directly to him or to
his account at the Toronto-Dominion Bank, $197,500 at his direction
to Daylite of Grand Bahama, and the remaining $182,000 to Associated
Canadian Holdings for the acquisition from that company of his shares
of Commodore Business Machines at $3.50 per share, which has been
referred to above. The disposal of these profits will be the subject of
further comment, based on the latest investigations dealing with the net
worth of C. P. Morgan. He and his wife, beginning in 1961 and ending
in July 1965, bought 457,700 and sold 446,595 shares, ending in a long
position of 11,105 shares. Their total cost was $1,555,774.72 and
their sales yielded $2,022,843.22, with a net profit of $467,068.50. They
had therefore 11,105 shares free in their hands. These figures must be
qualified by the observation that they include the sale of the Morgans'
Commodore Business Machines shares to Associated Canadian Holdings
in exchange for the stock of the latter, and the re-purchase of the shares
from that company at $3.50 per share pursuant to the terms of the
option agreement; that there are indications that some portion of their
profits were given to or accrued to W. L. Walton and Harry Wagman, if
one is to assume that both Morgan and Wagman held a small portion of
their shares in trust for Walton, and that Wagman, who received 22,500
of the Streit shares, paid Morgan nothing for them, which would appear
to be the case; and that it also included most, if not all of the amounts
remitted to Frank Kaftel, or I.F.A.S., which will probably never be
exactly determined. Morgan was at least on one occasion unsuccessful
in persuading Jack Tramiel to have Commodore Business Machines retain
the services of Kaftel for a fee, a proposal which Tramiel unkindly sug-
gested should be submitted to the board of directors of Commodore Busi-
ness Machines. It would be fair to say that the state of these accounts should
be attributed to Mr. and Mrs. Morgan and Walton and Wagman, less
any expenses incurred in the course of the transactions with Harold
Antin and Frank Kaftel.1
N.G.K. Investments, of the shares of which British Mortgage &
Trust held 20%, Mr. and Mrs. W. P. Gregory 12%, Carman G. King
and his family 14% and Morgan, Walton and Wagman 22%, the
directors of which included Morgan, King and Gregory and for which
Morgan made no secret of having entire discretion as to investments,
bought and sold 26,500 shares making a net profit of $69,165,2 includ-
ing a sale of 6,833 shares to the C. P. Morgan account at a price of $5
on November 10, 1964, when the market price was $6.50 per share.
Dallas Holdings, a Trio company, between June 1962 and July 1965
bought 385,417 and sold 373,017, resulting in a long position of 12,400
shares at an average cost of $5.75 each, after paying $1,041,622.10 and
1Exhibit2191.
•Exhibit 2192.
390
Chapter VIII
receiving $97 1.637. 13. :! Trans Commercial Acceptance, a company
owned by Tramiel and Kapp. traded between July 1964 and May 1965,
buying 126.950 and selling 0 1.170 shares and paying $820,980, receiv-
ing $531,271 and achieving a long position of 65,780 shares at an
average cost of S4.40.4 The Hugo Oppenheim Bank in Berlin, the
affairs of which were, as will be seen, entirely under the control of Jack
Tramiel, its largest shareholder, began trading on September 16, 1964,
and by the end of June 1965 had bought 180,020 shares and sold
120,705, leaving a net accumulation of 59,315 after payments in the
amount of $1,181,143 and receipts of $810,463. Its remaining shares
cost approximately $6 each. Its Canadian subsidiary, Hugo Oppenheim-
bank (Canada) Limited, also under the control of Tramiel, bought a
total of 54.270 shares and sold 35,120, remaining in a long position of
19,150 shares at an average cost of $7. This company's holdings, in
particular, were completely sold out by O'Brien & Williams to cover
margined accounts after the collapse of Atlantic Acceptance. Valley
Farm and Enterprises, another Trio company, trading from June 1962
until February 1963, bought 385,518 shares and sold 391,368, being
short 5,850. It paid $930^554.70 and received $1,218,835.87 for a net
revenue of $288,281.17, less whatever it might have cost it to cover its
short position, which may in any event have been taken care of by the
stock dividend of one share for each twenty held, paid in December
1964." Evermac Office Equipment, owned by Tramiel and Kapp, began
to buy shares on August 15, 1962 from Don Mills at a price of S3, and
between then and May 1965 it bought 44,258 shares and sold 31,723.
Its net expenditure was $85,911.40 at a cost of between $6.50 and
$6.75 per share.
The trading of the Tramiel, Kapp and Silberman families was sub-
ject to a special consideration involving Associated Canadian Holdings.
Between November 5, 1958 and September 22, 1965, Jack and Helen
Tramiel bought 139,982 shares and sold 145,179, the sales after the
Atlantic collapse having been made by the Mercantile Bank of Canada
in August and September 1965 in the amount of 21,310 shares, which,
were pledged as collateral to loans made by that institution to Tramiel.
In the end they were short 5,197 shares, having paid $1 19.307.43 and
received $483,352.80 for a net revenue of $364,225.39. it will be
recalled that they had sold almost 100,000 shares of Commodore Busi-
ness Machines to Associated Canadian Holdings, receiving in exchange
shares of that company having a value of $3.50 for one common share
and one-half a preference share. If this transaction had not been entered
into, their cash proceeds would be only $17,529.39, and their position
would have been long 93,859 shares at no cost to them." Similarly
'Exhibit 2193.
'Exhibit 2194.
'Exhibits 2195-7.
"Exhibit 2198.
391
Commodore Business Machines
Manfred and Estelle Kapp, from November 1958 until April 1965,
bought 141,874 and sold 123,576 shares at a cost of $121,225.66 for
total proceeds of $468,602.50, an apparent net profit of $347,376.84.
If they had not sold 49,708 shares to Associated Canadian Holdings,
their net revenue would have been $11,177.34, and their position would
have been long 1 14,350 shares at no cost. Benjamin and Regina Silber-
man paid $6,017 for 27,500 shares, of which they sold 24,750 between
November 1958 and December 1961, giving them a net revenue position
of $80,608. If they had not entered into the transaction with Associ-
ated Canadian Holdings, they would have had their 27,500 shares for
their original cost, their only sale being to that company.7 Associated
Canadian Holdings is, of course, now bankrupt, and the position of its
shareholders can only be determined after action by it to enforce the
terms of the option agreement, pursuant to which there were set up on its
books debts by the Tramiels, Kapps and Silbermans consequent upon
an obligation to pay $3.50 per share for 250,600 shares.
The trading of J. A. Medland and Carman G. King, both directors
of Commodore Business Machines, was simple enough. The former and
members of his family, between 1961 and June 1965, bought 84,700
shares, of which 72,500 were treasury stock acquired in 1960 and 1961
under circumstances which have been referred to, and 10,000 bought
on July 10, 1962 just before the listing of the stock on the Canadian
Stock Exchange. All of these shares were sold between 1962 and June
1965 for a net profit of $251, 106. 8 King acquired 39,710 shares begin-
ning in 1960, but did not start selling until the listing of the stock, and
then, between August 1962 and October 1965, he sold 47,120 shares,
apparently being short 7,410 shares and having realized a net revenue
of $229,822.56.9
In this connection King testified to the Commission on December
21, 196610 that he had discussed his trading with Mr. Wolfman, and
pointed out that, because of his holdings of convertible debentures, he
was not short any shares in October and his profit was only in the
neighbourhood of $175,000. There is no reason to doubt that this was
the case.
Throughout the period of this trading Jack Tramiel and Manfred
Kapp were directors of Commodore Business Machines, and together
with C. P. Morgan, who became a director on October 17, 1962, were
insiders in the most extreme sense of the term. Carman King was a
director from October 3, 1960 to June 22, 1965. J. A. Medland re-
turned to the board on October 17, 1962, and remained until June 22,
1965. All of them were substantially enriched by their market opera-
tions in the stock of Commodore Business Machines, but only to Morgan,
'Exhibits 2201-2.
"Exhibit 2200.
•Exhibit 2203.
"Evidence Volume 93.
392
Chapter VIII
Tramiel, Kapp and Goodfellow, who became a director on November
20, 1963, can there definitely be imputed knowledge of the transactions
with Kaftel. Tramiel, indeed, denied on oath before the Commission that
he had attended any meeting with Kaftel, other than the first on October
31, 1964, but Kaftel said he was present at a second meeting on Decem-
ber 3 with Morgan and Goodfellow and took an active part in the dis-
cussion, even to the extent of expostulating against the payment of
$25,000 to Kaftel for the week under discussion, because 35,000 shares
had not been sold. The attendance of Tramiel at this second meeting
is indicated by the records of the Hotel Georges V, and in this conflict
of the evidence I prefer to rely on Kaftel 's unsworn statement.11
Cheques to "F. Kulunderino"
There follows a list of cheques drawn on the Bank of Nova Scotia
account of Daylite of Grand Bahama Limited, signed by E. Last and
H. Wagman, and made payable to "F. Kulunderino".1
Amount Deposited to the credit of
$45,000 Galco Trust Reg.
35,000 A. Gillieron & Banque Jordaan
S.A.
25,000 L. G. Beaubian, & J. L. Levesque
Inc.
25,000 W. C. Pitfield Company Ltd.
25,000 Boucqueau Luyckx & Co.
25,000 W. C. Pitfield & Company,
Montreal
25,000 W. C. Pitfield & Company
25,000 W. C. Pitfield & Company
10,000 W. C. Pitfield & Company
25,000 W. C. Pitfield & Company
25,000 W. C. Pitfield & Company
27,500 W. C. Pitfield & Company
1 2,500 W. C. Pitfield & Company
42,400 W. C. Pitfield & Company
$372,400
Date
June 26, 1964
October 14, 1964
October 26, 1964
November 5, 1964
November 12, 1964
November 19, 1964
November 27, 1964
December 8, 1964
January 8, 1965
January 15, 1965
January 22, 1965
January 29, 1965
February 6, 1965
February 12, 1965
The first one dated June 26, 1964 in the amount of $45,000, endorsed
"F. Kulunderino" and deposited to the credit of Galco Trust Reg., has
already been referred to, and the evidence before the Commission Is that
funds transferred in this case came from those contributed for this pur-
pose to Daylite of Grand Bahama. This cheque is the one Kaftel denied
"Appendix G.
'Exhibit 3894.
393
Commodore Business Machines
any knowledge of, and by reason of its date would appear to be related
to some transaction other than that involving Commodore Business
Machines shares, and perhaps to Lucayan Beach Hotel Limited as the
payment made on behalf of Allen Manus, of which Kaftel said he got
some $20,000. He denied that the endorsement on this cheque was in
his handwriting. The next six cheques, beginning with that dated Octo-
ber 14 for $35,000 and ending with the cheque dated December 8 for
$25,000, are all in effect admitted by Kaftel in his statement as having
been received, although he said that in the absence of any written
records he could not be sure of the amounts. The proceeds of the
remaining six cheques, beginning with that of January 8, 1965 for
$10,000 and ending with that of February 12, 1965 for $42,400, he
said he did not receive, and did not know who did. There may have been
some reservation, not communicated to the Commission, in the words of
his statement which are, specifically, as follows, "I say that I did not
receive the proceeds of these cheques and I do not know who did". They
are none the less all endorsed "F. Kulunderino", and in the same hand
as those which have been at least tacitly acknowledged. There is another
point of similarity affecting most of them, in that all the cheques in
respect of which W. C. Pitfield & Co. in Montreal was the ultimate
payee are initially endorsed in favour of Boucqueau Luyckx & Co. of
Brussels. In three instances these cheques passed through the hands of
Swiss banks, and all of the cheques which ultimately reached W. C.
Pitfield may well have had nothing to do with the affairs of Kaftel, but
may have been made thus payable in settlement of outstanding balances
in Canadian funds by the intermediate payees. Kaftel said that, at this
third meeting at the Hotel Georges V with Morgan and Goodfellow on
January 10, 1965, the terms of the deal in Commodore Business
Machines shares had changed, and he was to receive $8,000 per week
henceforth for supporting them in his bulletin for four weeks. It was at
this meeting that the arrangements were made with respect to the manip-
ulation of the shares of Analogue Controls. There seems to be little
doubt that Kaftel received, or otherwise disposed of, all the funds trans-
ferred by these cheques of Daylite of Grand Bahama in the total amount
of $372,400, of which all but the first $45,000 were transferred to Day-
lite of Grand Bahama from Morgan's accounts. Kaftel was a most diffi-
cult witness to pin down and, although he himself had suggested the
circumstances under which he was interviewed, since he said he was
suffering from heart disease and could not travel, counsel had to endure
many hours of rambling irrelevancy in order to distil from his conver-
sation the concise statement which he eventually, after many emenda-
tions, acknowledged to be a true presentation of his evidence. If all of
the money paid to Kaftel, of which Jules Schoen, as was admitted, was
entitled to 10%, was paid in respect of services in the Commodore
394
Chapter VIII
Business Machines market operation, Morgan's profit of $467,068.50
was drastically reduced, particularly if some portion of it accrued to
Walton and Wagman.
Convertible Debentures Series A, B and C
In addition to its common stock Commodore Business Machines
issued convertible debentures and preference shares. Three series of
debentures were issued, the first being for $1,000,000, dated November
1, 1962, maturing November 1, 1974, convertible and yielding 1% per
annum with share purchase warrants attached, and were underwritten by
Annett & Co.,1 and the following letter from Carman G. King to Jack
Tramiel, dated September 21, 1962, sets out the initial understanding
and requirements of the underwriter:
"Dear Jack: Re: Commodore Business Machines (Canada) Limited
This will confirm our telephone conversations of today in which we
have agreed, subject to certain conditions, to underwrite $1 million 7%
12-year convertible debentures, convertible at $4.00 per share for the
term of the debentures at $94 and accrued interest and 200,000 share
purchase warrants, exercisable at $4.50 per share for 12 years at 5 cents
per warrant, applicable on 100,000 warrants only.
The convertibles will be non-convertible until July 1, 1963 and the
warrants will be non-exercisable until July 1, 1963.
The convertibles will be redeemable at a premium of 6% on thirty
days' notice on or before November 15, 1964, decreasing one half of
one percent each year thereafter.
There will be a 100% sinking fund commencing November 15, 1965.
The debentures will be a first floating charge after bank loans and
secured debt.
This undertaking is made subject to our being fully satisfied on the
condition of the business, the verification of any representations, subject
to Annett & Company Limited signing a mutually satisfactory under-
writing agreement, and subject to your undertaking to place up to $500,-
000 of life insurance on your life for the security of the debenture-
holders.
It is also on the condition that Mr. C. Powell Morgan become Chair-
man of the Board, that Mr. Aubrey Medland be appointed to the Board
and that Annett & Company Limited make another nomination.
With kind regards,
Sincerely yours,
CGK/EB. 'Carman G. King.'
P.S. This letter does not constitute an underwriting but is a letter of in-
tent only. 'C.G.K.' "
Annett & Co.'s price was subsequently reduced to $93.50 per $100 face
value. Medland in his evidence did not mention King's insistence on his
rejoining the board of Commodore Business Machines as an element in
Exhibit 346.
395
Commodore Business Machines
his own decision, but clearly King must have been one of those who
urged his return. Douglas R. Annett was the additional nominee, and
Morgan, Medland and Annett joined the board on October 17. Half of
the issue was taken by Dallas Holdings and Lambert Management Cor-
poration, in amounts of $200,000 and $300,000 respectively, at a dis-
count of 5 % as will be seen, and the balance was fairly well distributed,
mostly at par. Both Dallas Holdings and Lambert Management Cor-
poration borrowed money to make this purchase from Aurora Leasing
Corporation, the former on November 30 and the latter, in the guise of
Chisholm & Co., on December 10 at 7%.2 The main features of the
distribution are illustrated as follows:3
COMMODORE BUSINESS MACHINES (CANADA) LIMITED
Series A Debenture Issue
UNDERWRITTEN BY ANNETT & COMPANY LIMITED
Payment Par Value of
Sales per records of Annett & Company Received Debentures
Dallas Holdings Limited— at 95 $ 189,940.00 $ 200,000.00
Lambert Management Corporation —
at 95 284,910.00 300,000.00
—at 100 6,997.90 7,000.00
R.D. Steers and Company— at 97 .... 4,848.50 5,000.00
W. D. Latimer— Personal — at 97 .... 9,697.00 10,000.00
496,393.40 522,000.00
The balance issued at 100 to the following:
British Mortgage & Trust 49,985.00 50,000.00
Mr. A. Leith — c/o Eatons Estates
Office 39,988.00 40,000.00
C. G. King— c/o Annett & Partners 24,922.50 25,000.00
D. R. Annett 4,998.50 5,000.00
Mr. C. C. Annett 1.999.40 2,000.00
R. A. Goodfellow 4,998.50 5,000.00
Jack Tramiel 7,997.60 8,000.00
Argyle Development Corp 24,992.50 25,000.00
W. H. Wallace 9,997.00 10,000.00
Bank of Montreal — a/c 200 — Mr.
G. A. Pearce 49,995.50 50,000.00
Montreal Trust Co. — Investment
Dept.— Dr. D. Jordan 24,992.50 25,000.00
Bank of Nova Scotia — Purchases
through New York Branch 14,995.50 15,000.00
Royal Bank— 30 St. Clair West-
Account #1632 4,998.50 5,000.00
Exhibits 1660.1 and 1660.2.
"Exhibit 2208.
396
Chapter VIII
Payment Par Value of
Sales per records of Annett & Company Received Debentures
Bank of Nova Scotia for:
Alan T. Christie of Lambert & Co. 49,985.00 50,000.00
J. Tramiel 4,998.50 5,000.00
Mrs. K. P. Lelandais — formerly
c/o Lambert & Co 9,997.00 10,000.00
Mrs. E. C. Land — c/o Lambert &
Co 9,997.00 10,000.00
A. C. Maher— c/o Lambert & Co. 4,998.50 5,000.00
Miss A. Witko — c/o Lambert &
Co 3,998.80 4,000.00
Fenimore Fisher — President of
Analogue Controls 9,997.00 10,000.00
Other regular U.S. customers of
Annett 32,990.10 33,000.00
Other Canadian customers ($9,000
to Annett & Co. employees) 157,512.25 157,500.00
Total subscription 1,045,728.55 1,071,500.00
Purchased from Brokers — Dec. 3/62
at 103V2 (20,700.00) (20,000.00)
1,025,028.55 1,051,500.00
Less : Short Position — Assuming
same cost to cover (1 03^2) 53,302.50 51,500.00
Total value of issue 971,726.05 1,000,000.00
Paid to Commodore Business
Machines (Interest $5,561.64) .... 945,561.64
Estimated Profit on Underwriting .... $26,164.41
All the proceeds of this issue went to Commodore Sales Acceptance, and
substantially reduced the outstanding loans of that company to Commo-
dore Business Machines. Thereafter the level of loans from Commodore
Sales Acceptance again rose rapidly, and it must be borne in mind that
$500,000 of the total proceeds, employed to reduce the standing balance
in favour of Commodore Sales Acceptance, was lent by the latter to
Aurora to finance the purchases of Dallas Holdings and Lambert Man-
agement Corporation. A curious and characteristic footnote to tins
issue is provided by a letter, dated January 2, 1963, from Annett & Co. to
Morgan about a legal bill for the underwriting, referring to an agree-
ment that it should be paid as to $2,500 by Commodore Business
Machines, the balance being payable as to 50% by Annett & Co., 30%
by Lambert & Co. and 20% by Morgan himself. The letter4 asks for
'Exhibit 1761.1.
397
Commodore Business Machines
a remittance of $386. At the foot of the page there is a note in Morgan's
handwriting: "Harry get a bill from Annett for $386. Should be charged
to Dallas. C.P.M."
The Series B debentures, also convertible and yielding 7% per
annum with share purchase warrants attached, were issued on May 13,
1963 for a total amount of $600,000, and were subscribed for by the
following persons in the amounts set opposite their names:
D. R. Annett $ 50,000
Carman G. King 50,000
Manfred Kapp 100,000
C. Powell Morgan 100,000
Harry Wagman 100,000
William L. Walton 100,000
J. A. Medland 100,000
$600,000
These were issued at par, and all the subscribers, except Medland, paid
for them by borrowing the necessary funds from British Mortgage &
Trust Company, pledging the debentures as security, plus 42,725 shares
of Commodore Business Machines, which were registered in the name
of H. Wagman in trust, and were among the shares belonging to the
Morgan, Tramiel, Kapp and Silberman families, ultimately transferred
to Associated Canadian Holdings, although remaining in pledge. The
rate of interest on this loan of $500,000 was 7%, and it was repayable
on October 20, 1963. As an additional inducement, the trust company
received warrants to purchase 10,000 common shares of Commodore
Business Machines at $5.50 per share.5 Solomon, Singer & Rosen, not
its general solicitors, acted for British Mortgage & Trust in this intimate
transaction.
The Series C debentures were of the same order, were issued in
May 1964 for an aggregate face value of $600,000 and were, like Series
B, privately placed, but this time at a 5% discount. N.G.K. Investments
bought $250,000 worth, Associated Canadian Holdings $250,000 and
Jack Tramiel $100,000. N.G.K. Investments borrowed $250,000 from
Aurora Leasing, but only paid $237,500 plus accrued interest, as did
Associated Canadian Holdings, to Commodore Business Machines;
Aurora Leasing borrowed it from Commodore Sales Acceptance. Tra-
miel borrowed $80,000 from the Bank of Nova Scotia, pledging his
debentures, and the remaining $15,000, without giving security, from
his own company, Trans Commercial Acceptance. He then paid
$82,000 to the American Express Company in New York on June l,6
and $14,1 16.33 to Commodore Business Machines,7 which recorded two
separate receipts from him in the latter amount, and for $81,957.64. The
•Exhibit 347.
•Exhibit 2211.
"Exhibit 2212.
398
Chapter VIII
payment to the American Express Company is unexplained, but the pro-
ceeds of this issue were divided between Commodore Sales Acceptance
and the American Express Company, in the latter case as a standing
deposit is the amount of $377,625 in U.S. funds, to secure a loan made
by it to the Willy Feiler Company of D.M. 1.500.000. All three issues
of debentures were secured by a floating charge on the property of Com-
modore Business Machines, evidenced by conveyance to the Montreal
Trust Company as trustee.
The Subordinated Note and Preference Share Issue of December 1964
The last security financing by Commodore Business Machines in
the period under consideration in this report occurred in December
1964. and was by no means as straightforward in its outcome as its pre-
decessors. It took the form of an issue of $1,000,000 of 63A% sub-
ordinated notes, secured by trust indenture between the company and
the Montreal Trust Company as trustee, and $1,000,000 in the form of
100.000 preference shares (Series A) yielding 6%. The trust deed was
dated December 1, 1964, and apparently the whole month of December
was devoted to the intricate transactions, which had a profound effect
on the future of the company and on the situation of its principal credi-
tor, Atlantic Acceptance, and its subsidiaries, Commodore Sales Accept-
ance and Commodore Factors. The purchaser of the whole package was
the Hugo Oppenheim Bank in Berlin. The agreement of sale took the
form of a letter, dated December 1, 1964, from Commodore Business
Machines (Canada) Limited of 946 Warden Avenue in Toronto to
Hugo Oppenheim und Sohn in Berlin, written in English, in which the
price of the million dollar issue of notes was agreed to at $975,000, and
of preference shares at $950,000. The notes were to mature on Decem-
ber 1, 1969.1 On December 12 the Berlin bank entered into an option
agreement with Trans Commercial Acceptance, also of 946 Warden
Avenue, Toronto to put the securities to the latter company at par; and
also, and incidentally, to sell to it 100.000 common shares of Commo-
dore Business Machines for $650,000, this being part of another story
involving Five Wheels Limited and other companies, which must await
more detailed treatment with the other affairs of Hugo Oppenheim und
Sohn.2 The sole effect of that part of the transaction which is immedi-
ately relevant was to put a profit of $75,000 in Canadian funds forth-
with into the coffers of the bank. Trans Commercial Acceptance re-
quired $2,000,000 to pay Hugo Oppenheim und Sohn. and received
$1,500,000 from British Mortgage & Trust Company against its promis-
sory note, due February 1, 1965, with interest at lc/c , pledging the Com-
modore Business Machine notes and preference shares as security. The
remaining $500,000 was borrowed by Trans Commercial Acceptance
'Exhibit 349.
'Chapter X.
399
Commodore Business Machines
from Commodore Sales Acceptance without security. On December 29
the bank records of Commodore Business Machines showed a deposit
of $1,925,000, and those of Trans Commercial Acceptance3 of $2,805,-
000. In fact on the same day, December 23, in addition to the $2,805,000
deposited, there were additional deposits of $254,444.55 and $5,000.
The ingredient of $805,000 was advanced to Trans Commercial Accept-
ance by Commodore Business Machines, treating $305,000 as repay-
ment of a loan previously made to it by Trans Commercial Acceptance
and $500,000 as a deposit with that company. Trans Commercial
Acceptance was now in a position to pay $2,000,000 to Hugo Oppen-
heim und Sohn and $ 1 ,000,000 to Commodore Sales Acceptance. Com-
modore Business Machines on December 23 paid Commodore Factors
$1,120,000, in respect of loans to Commodore Business Machines Inc.
of $316,481.56, Commodore Drycopy Inc. of $157,100.64, Baronet
Associates of $571,706.80 and of U.S. exchange in the sum of $75,711.
On January 13 and January 14, 1965 Solomon & Singer painstakingly
reported to Hugo Oppenheim und Sohn and Trans Commercial Accept-
ance, for both of which they had been acting, and to both of which they
sent bills.4
It is difficult to sever that portion of this transaction, dealing with
the immediate relationships of Commodore Business Machines, Com-
modore Sales Acceptance and British Mortgage & Trust Company, from
contemporary entanglements, but the effort must be made. All of what
follows happened on December 23, 1964. British Mortgage & Trust
Company lent Trans Commercial Acceptance $1,500,000, and Com-
modore Sales Acceptance lend the same company $500,000. Trans
Commercial Acceptance paid the aggregate of $2,000,000 to Hugo
Oppenheim und Sohn for the issue of Commodore Business Machines
debentures and preference shares bought by the bank from Commo-
dore Business Machines, and put by it pursuant to option to Trans
Commercial Acceptance, which then pledged these securities with
British Mortgage & Trust. Hugo Oppenheim und Sohn paid Commo-
dore Business Machines $1,925,000 for these securities, thus realizing
a profit of $75,000. With these funds Commodore Business Machines
paid Trans Commercial Acceptance $805,000 and Commodore Factors
$1,120,000. Trans Commercial Acceptance repaid Commodore Sales
Acceptance the $500,000 advanced to it the same day, together with
an additional $500,000, by means of one cheque in the amount of
$1,000,000. In this fashion $1,500,000 of fresh funds, costing 7% per
annum, had been lent to the Commodore Business Machines group by
British Mortgage & Trust, and $1,620,000, which had cost it anywhere
from 8Vi% to 12%, had been paid back to Commodore Sales Accept-
ance and Commodore Factors. The amount of $75,000 retained by
•Exhibit 2218.
'Exhibits 2214-5.
400
Chapter VIII
Hugo Oppenheim und Sohn, plus the additional $ 1 20,000 in loan repay-
ment, had been found in funds from other sources represented by the
additional deposits of $259,444.55. The loan to Trans Commercial
Acceptance from British Mortgage & Trust was not repaid in February,
1965, and at June 17 of that year had only been reduced by $50,000. 5
Wilfrid Gregory, who only expected to accommodate Tramiel with
this very large amount of money for three weeks, asserted that it was
understood that his company was to get convertible debentures and
preferred stock as security, and as a bonus an option on 20% of the
stock of Hugo Oppenheim und Sohn. He blamed Solomon, quite unjusti-
fiably as the correspondence shows,6 for "completely letting us down",
since the $1,500,000 had been sent to him in escrow pending the receipt
of this bonus. Tramiel, he said, had told him that Morgan would get
the money for British Mortgage & Trust at any time Gregory wanted
it, and that Morgan had confirmed this.7 Morgan denied having given
such an undertaking, and said simply that Gregory had been tricked by
Tramiel. As a result of this disillusionment Gregory gave Tramiel and
Kapp three months to pay their personal loans from British Mortgage
& Trust, and in the event this ultimatum proved to be too generous.
Such is the story of the financing of Commodore Business Machines
to which $5,021,000 was contributed principally by British Mortgage
& Trust Company in the amount of $2,525,000, and Aurora Leasing
Corporation in the amount of $1,192,178.60, as a backward glance at
Table 37 will illustrate and confirm. Aurora's money, as has been seen,
was derived in great part from Commodore Sales Acceptance which
was, in turn, wholly beholden to Atlantic. By the complicated and barely
intelligible transaction last referred to a great load had been shifted
from Commodore Business Machines to Trans Commercial Acceptance,
a company which, in spite of Tramiel's quaint idea that loans supplied
by Morgan meant ownership by Morgan, was in fact owned by Tramiel
and Kapp. It was incorporated as a private company in Ontario on
December 16, 1963.8 The permanent directors were Tramiel, Kapp and
Carl M. Solomon, Tramiel being the president and Kapp the secretary.
Until September 10, 1964 there were only three common shares out-
standing valued at $3, but on that date Associated Canadian Holdings
subscribed for 14,997 common shares at $1 per share and 10,000 pref-
erence shares at $10 per share, and paid $1 14,997 in cash. The company
remained wholly-owned by Associated Canadian Holdings until Decem-
ber 23, 1964, when the latter sold all the shares to Hugo Oppenheim-
bank (Canada) Limited. A renewed examination of Table 38, which is
•Exhibits 2217-9.
•Exhibit 4636.
'Evidence Volume 116.
•Exhibit 296.
401
Commodore Business Machines
the history of loans made by Commodore Sales Acceptance to Commo-
dore Business Machines and its related companies, is now necessary to
appreciate the effect of the journal entry in the books of Commodore
Sales Acceptance which transferred to this fledgling, without invested
capital or assets, the indebtedness to Commodore Sales Acceptance of
Commodore Business Machines, in respect of inventory advances and
a note receivable at 12%, of Commodore Drycopy Limited, Humber
Typewriters & Business Equipment Limited and Evermac Office Equip-
ment Company Limited in the total amount of $917,830.34.
Purchase of Trans Commercial Acceptance by
Associated Canadian Holdings
From December 1963, therefore, until September 1964, Trans Com-
mercial Acceptance had as its only assets the $3 invested capital, plus
accounts receivable in respect of any loans made by it, which in turn
were exactly offset by sums of money borrowed from Commodore Sales
Acceptance in order to enable it to make these loans. The method by
which Associated Canadian Holdings, a company over 60% owned by
the Tramiel and Kapp families, bought Trans Commercial Acceptance,
a company owned by Tramiel and Kapp entirely, requires scrutiny. To
begin with Associated Canadian Holdings gave three cheques to Trans
Commercial Acceptance, the first dated July 27, 1964 for $40,0001
signed by Wagman and Tramiel, the second dated August 5, 1964 for
$25,000, signed by Tramiel and Kapp,2 and the third also dated August
5 and signed by Tramiel and Kapp, for $50,000. 3 According to the loan
register of Aurora Leasing Corporation, the first $40,000 was borrowed
from Aurora by Associated Canadian Holdings on July 27 and paid to
Trans Commercial Acceptance on the same day. Thereupon, on July 31,
Trans Commercial Acceptance borrowed $65,000 from Commodore
Sales Acceptance and on August 6 lent $50,000 of this money to Jack
Tramiel, who deposited it to his personal account at the Mercantile Bank
of Canada. Next day Tramiel borrowed $50,000 from the National Bank,
pledging as security 22,700 shares of Commodore Business Machines
belonging to Associated Canadian Holdings, the amount then standing to
his credit being $99,880, and representing the aggregate of $100,000 thus
acquired, less a small deduction apparently from the Trans Commercial
Acceptance loan. Also on the same day, Tramiel wrote a cheque to Barrett,
Goodfellow & Co. for $99,880, and the 22,700 shares of Commodore
Business Machines were supplied, according to that firm's memorandum,
in the following fashion:4
Exhibit 2220.
•Exhibit 2221.
•Exhibit 2222.
♦Exhibit 2223.
402
Chapter VIII
"Aug. 6/64
Receive: Commodore Shares 21720
Deliver from: Assoc Cdn
Holdings
To : Jack Tramiel
Acct. 980
Shs 22700 — Switched complete to Assoc.
Cdn.
Mercantile Bank will call
And pay $99880.00
Against delivery of 22700 shares cleared Aug 6/64
Assoc. Cdn. request Ck. Ck to be picked up by
10 a.m. Aug. 7/64.
Letter of authorization from Mr. Tramiel pending ? no longer required."
When Barrett, Goodfellow & Co. assembled the 22,700 shares, delivered
them to the Mercantile Bank and received $99,880 from Tramiel, they
paid the money forthwith to Associated Canadian Holdings which had
on the same day entered into an agreement with Tramiel,5 reciting his
debt to Trans Commercial Acceptance for $49,880 and to the Mercan-
tile Bank for $50,000, the deposit of the 22,700 shares with the bank
as security, and that he was at all times acting as trustee for Associated
Canadian Holdings in borrowing these sums. The agreement, which was
executed by Tramiel, and for Associated Canadian Holdings by Kapp
and Wagman, contains an acknowledgment of Tramiel's status as trustee
for the company, by Tramiel that the 22,700 shares pledged with the
bank are beneficially owned by the company, and Tramiel's covenant to
deliver them to the company or its nominees upon release by the bank.
The records of Associated Canadian Holdings show that it repaid
Tramiel $50,000, with interest running from August 7, 1964, by two
cheques, the first, dated February 16, 1965,6 in the amount of $17,500
made payable to the Mercantile Bank, and the second, dated April 1,
1965, to Tramiel personally in the amount of $3 3, 040.70. 7 Although
Associated Canadian Holdings treated this as repayment in full of its
indebtedness to Tramiel, the loan card in respect of his indebtedness at
the Mercantile Bank8 records only the payment of February 17, 1965 in
the principal amount of $17,500, leaving a balance owing of $32,500,
since Associated Canadian Holdings' cheque for $33,040.70 of April 1
was deposited directly into Tramiel's personal account. Moreover, on
March 2 an additional $50,000 had been borrowed by Tramiel so that
"Exhibit 2224.
•Exhibit 2225.
'Exhibit 2226.
'Exhibit 2227.
403
Commodore Business Machines
the outstanding balance was $82,500. The loan not having been repaid,
Associated Canadian Holdings did not receive back its 22,700 shares of
Commodore Business Machines, although there was a subsequent reduc-
tion of the principal amount by $6,000 on June 8, 1965 resulting from
the sale of shares of Atlantic Acceptance held as additional collateral
by the Mercantile Bank. Associated Canadian Holdings thus invested
$115,000 in the shares of Trans Commercial Acceptance, first borrow-
ing $40,000 from Aurora Leasing, secondly $50,000 from Trans Com-
mercial Acceptance through Tramiel as its nominee, and thirdly the
balance of $25,000 by using part of the proceeds of the loan of $49,880,
made to him by the Mercantile Bank on its behalf, against the security
of 22,700 shares of Commodore Business Machines which it owned but
did not recover. Both the $50,000 lent in this manner by Trans Com-
mercial Acceptance to Associated Canadian Holdings, and the $40,000
lent to the latter by Aurora Leasing, were Atlantic funds.
The Interposition of Trans Commercial Acceptance and
Baronet Associates Inc.
The loan records of Commodore Sales Acceptance reveal the true
purpose behind the creation of Trans Commercial Acceptance, and
show that, whereas the former had been receiving 12% on its inventory
advances to Commodore Business Machines, on its large "note receiv-
able" loan and on its loans to subsidiary companies, Commodore Drycopy
Limited and Evermac Office Equipment, and 1 5 % on loans to Humber
Typewriters before the consolidation and transfer of the indebtedness
to Trans Commercial Acceptance in December 1963, Commodore Sales
Acceptance thenceforth charged Trans Commercial Acceptance only
SV2% per annum on the outstanding balance of $917,830.34 and all
balances thereafter. Trans Commercial Acceptance, however, continued to
charge these debtors 12%, and to that extent only Humber Typewriters
benefited from the change. The high point of the Commodore Sales Ac-
ceptance loans to Trans Commercial Acceptance was reached in August
1964 at a round figure of $1,021,000, having declined by June 17, 1965
to approximately $912,000. For the year ended December 31, 1964
the financial statements of Trans Commercial Acceptance1 show a net
profit of $26,674, being the difference between interest revenue of
$118,000 and interest paid of $82,000, with some minor office ex-
penses.2 This arrangement was embodied in agreements between Com-
modore Business Machines and its subsidiaries, on the one hand, and
Trans Commercial Acceptance on the other, the first being dated June
11, 1964 and executed for both parties by Manfred Kapp as secretary-
treasurer of both companies.3 All the agreements are of even date with
1Exhibit 298.
•Exhibit 2233.
sExhibit 2229.
404
Chapter VIII
the first and similarly executed. They all provide for Trans Commercial
Acceptance lending to the other party 100% of the net invoice balance
of the inventory at 12% interest, and similarly of accounts receivable,
for a period of five years. Also in June 1964, the same situation was
arrived at with respect to the loans made by Commodore Factors Lim-
ited to Commodore Drycopy Inc., A.C.E. Business Machines Inc.,
Jay-Man Distributors Inc., Commodore Business Machines Inc., and
Analogue Controls Inc., which were consolidated and transferred to a
new debtor by the name of Baronet Associates Inc., by journal entry, in
the aggregate amount of $1,590,185.03. Baronet Associates had been
incorporated as a New York Company on February 26, 1964, with two
shares initially issued of $50 each to Jack Tramiel and Manfred Kapp,
Tramiel being president and Kapp vice-president and secretary. These
shares were eventually transferred to Evermac Office Equipment, as it
would appear, on July 8, 1965. The legal work was done by Benjamin
H. Oremland and, although his reporting letter addressed to the prin-
cipals as "Dear Jack and Mannie", dated as late as October 23, 1964,
cites the payment of the sum of $100 by Tramiel and Kapp for the
shares issued to them, the interim balance sheet for the period ending
December 31, 1964, prepared by Wagman, Fruitman & Lando without
audit, shows no funds invested for shares.4 A profit and loss statement
for the six months ending on that date shows a net profit after taxes of
$20,748.02, made up in the same way as the profit of Trans Commercial
Acceptance. After June 30, 1964 Commodore Factors, which was
originally getting 12% per annum on its loans to the American sub-
sidiaries and associated companies of Commodore Business Machines,
received 8V^% from Baronet Associates which continued to charge
12%, except in the case of a loan of A.C.E. Business Machines where
the rate was reduced to 81/2%.5
No satisfactory explanation of this extraordinary arrangement was
vouchsafed in evidence by either Tramiel or Morgan. Tramiel said that
a reduction in the rate of interest charged by Commodore Sales Accept-
ance and Commodore Factors had been contemplated for some time
before the incorporation of Trans Commercial Acceptance and Baronet
Associates, and that Morgan had suggested the creation of these com-
panies, to give "tighter control" and observation of the cost and size of
the loans before taking further action. Not only could this have been
done, as it was doubtless done in any event, in the books of the lending
companies, but the situation of the borrowing companies was not in any
way improved by the device adopted. The financial statements of both
Trans Commercial Acceptance as at December 31. 1964'"' and Com-
modore Business Machines as at June 30. 19647 are silent as to any
4Exhibit 706.
"Exhibits 2237-8.
"Exhibit 298.
"Exhibit 356.
405
Commodore Business Machines
obligation to re-adjust interest rates in favour of Commodore Business
Machines and its subsidiary companies, and in fact no such adjustment
was made, except by Commodore Sales Acceptance and Commodore
Factors in favour of Trans Commercial Acceptance and Baronet Asso-
ciates. Tramiel maintained that he and Kapp were merely nominees of
Morgan in both Trans Commercial Acceptance and Baronet Associates,
was particularly insistent about Baronet, and could not recall giving any
instructions to Oremland about its incorporation. Morgan was equally
emphatic to the contrary.8
. . ."In Mr. Tramiel's evidence I believe he also stated that I suggested
that Trans Commercial be accepted — accepted or incorporated, and I
was a beneficial owner of these shares. This I flatly deny. The same with
Baronet Associates, this I flatly deny. These were the brain children of
Mr. Tramiel. He was fed up to the teeth of paying the interest to
Atlantic.
Again he felt his company shouldn't have to pay 12 per cent, what-
ever the interest rate was being paid to Commodore Sales Acceptance or
Commodore Factors, and he agreed these other companies — and I found
out later that he was charging the office the same rate, whereas I had
reduced the rate because if it was going to discount in September from 12
per cent to 8V2 per cent, so the beneficial difference between %Vi per
cent and 12 per cent remained with Baronet or Trans Commercial, and
this accrued to the benefit of Mr. Tramiel and Mr. Kapp and nobody else.
Q. Let me see if I understand that. Do you say that Atlantic agreed
upon lending the money to Commodore Business Machines at 12 per
cent?
A. Yes.
Q. And that Mr. Tramiel arranged that if a second company could be
interposed between Atlantic and Commodore Business Machines, the
effect would be to reduce the rate from 12 per cent to 8V2 per cent, is
that so?
A. That's correct.
Q. And that accordingly he set up Trans Commercial Acceptance, he
set up Baronet Associates, which borrowed from Atlantic at 8V2 per
cent, then loaned that money to Commodore Business Machines, is
that so?
A. Or Commodore tried to get whatever companies —
Q. One of the companies?
A. One of the associated companies.
Q. The business machines group?
A. That is correct.
"Evidence Volume 25, p. 3399.
406
Chapter VIII
Q. And do you say that in fact the Commodore Business companies
paid the same rate of interest as they had been paying before these
companies were incorporated?
A. Exactly.
Q. Why was the interest rate dropped because of the interposition of
Trans Commercial or Baronet, neither one of which had any assets?
A. Well, they were supposed to have $200,000 of equity capital in
both instances — both were supposed to have that. And this had been,
Mr. Tramiel had told me that this was being subscribed for by German
interests and the same with Baronet, by Irish interests, in this particular
case. But in any event, I was satisfied with Commodore's stability, that
I was happy with %Vz per cent."
One can understand Tramiel's dissatisfaction with the 12% rate, and
the characteristic decision that when the rate was lowered he, and not
his shareholders, would get the benefit of the reduction. It is less easy
to understand Morgan acquiescing in this without sharing in the benefit,
but there is no evidence of any direct interest of Morgan's in either
Trans Commercial Acceptance or Baronet Associates, other than through
his minority position in Associated Canadian Holdings which for a time
owned the former. In this conflict of evidence, given by guilty men, I
reject that of Tramiel and accept that of Morgan, with the qualification
that Morgan at this point was relying on Tramiel to fry other fish for
him in Germany, and was not in a position to provoke a breach. As usual,
both Morgan and Tramiel had their own private interests firmly in view,
and ignored their public responsibilities.
Pearlsound Distributors and Humber Typewriters & Business Equipment
Throughout the preceding pages reference has been made to two
companies, Pearlsound Distributors Limited and Humber Typewriters
& Business Equipment Limited, with an undertaking to say more about
their relationship with Commodore Business Machines. In June 1961
N.G.K. Investments had paid $50,000 into the treasury of Pearlsound
Distributors, receiving in return all the issued common shares to the
number of 50,000. Subsequently the minutes of a meeting of the board
of directors of N.G.K. Investments, dated September 28, 1962, record
ratification of the sale of these shares to Evermac Office Equipment in
return for 17,500 common shares of Commodore Business Machines, to
which were ascribed a value of $52,500. The sale had in fact occurred
on July 27, 1962, and the shares of Commodore Business Machines with
which Evermac made its purchase were part of the block disposed of
by C. P. Morgan, Jack Tramiel and Manfred Kapp, under the style of
Don Mills. Evermac, as will be recalled, was originally JBvcrcst-QfScc
Eqmpmcnt Company Limited* incorporated some three years before
Commodore Portable Typewriter Limited on September 21, 1955, and
407
/^\Je,roJ>^~ Office. McLc.htrvz-. Ccjmsoarty /,/m/f~e-rl
Commodore Business Machines
was the original corporate vehicle used by Tramiel and Kapp in their
first enterprise in Toronto. The name was changed by supplementary
letters patent to Evermac Office Equipment Company Limited on Sep-
tember 10, 1958, contemporaneously with the creation of Commodore
Portable Typewriter Limited. The minute books and shareholders reg-
ister of Evermac1 show 1,000 common shares as having been issued, as
do the company's returns under the Corporations Information Act,
although the financial statements show 2,000 issued shares. In any event,
apart from the qualifying shares, the owners of all of these were Jack
Tramiel and Manfred Kapp, their wives having held shares in the earlier
days. The minutes of meetings of the company's board of directors re-
corded the purchase of the Pearlsound shares from N.G.K. Investments
as being made, on July 27, 1962, in return for 17,500 shares of Com-
modore Business Machines, but there is no contract in writing appar-
ently in existence in connection with this purchase which was made,
according to the financial statement of Pearlsound for the year ended
June 30, 1962,2 substantially at the book value of its shares. Three days
later Pearlsound acquired all the shares of a company known as Humber
Typewriters & Business Equipment Limited, and on this occasion an
agreement of purchase and sale was apparently executed.3 The agree-
ment provided for A. J. E. Fulford and his wife, who owned all the issued
shares of Humber, selling them to Pearlsound for the price of $105,-
913.77, of which $79,433.77 was to be paid in 36 equal monthly instal-
ments of $2,206.50, and the balance of $26,480 by the delivery of
10,592 common shares of Commodore Business Machines. The book
value of Humber shares, according to the balance sheet annexed to the
agreement, was $57,323, with earnings before taxes of $10,735.48. After
this acquisition Pearlsound sold Humber to its own parent, Evermac, in
a transaction which is alleged in the Evermac minute book to have
occurred on January 16, 1963, although a letter from Pearlsound to
Evermac, dated April 29, 1963,4 indicates that the transaction was not
completed until April 30, and may not have been contemplated before
the spring. It provides for a total consideration of $111,600, made up
of $52,024.73, payable forthwith, and 27 monthly instalments begin-
ning May 15, 1963 and concluding June 15, 1965, in the same amount
of $2,206.50, Evermac assuming responsibility for the monthly pay-
ments to Mr. and Mrs. Fulford and paying in the aggregate some
$5,500 more than Pearlsound had paid for the shares in the previous
July. The agreement incorporating the terms of this letter and signed for
both Pearlsound and Evermac by Manfred Kapp is, like the minutes,
1Exhibit 239.
•Exhibit 33-5.
•Exhibit 334.
'Exhibit 2245.
408
Chapter VIII
dated January 16, 1963, and the financial statement of Humber Type-
writers, as of December 31, 1962,5 indicates a net profit before taxes of
$17,277 and capital surplus of $41,906. Forthwith, if one accepts the
tenor of the letter from Pearlsound to Evermac, and after a barely decent
interval, if January 16 is to be regarded as the date of the purchase by
Pearlsound, Evermac, according to its own records on April 18, sold
Humber Typewriters to Commodore Business Machines for the aston-
ishing price of $175,000, which was paid by the latter cancelling a debt
of $23,000 owed by Evermac, and remitting the balance of $151,500
on closing. Evermac, which on April 25, 1963 had issued a cheque to
Pearlsound for $52,024.73 to mark the conclusion of its own purchase
of Humber Typewriters, received $151,500 in cash from Commodore
Business Machines on April 26 for the same property.6 It is not unreas-
onable to assume that both these transactions are contemporaneous, and
that the date of January 1 6, inserted in the minutes and in the agreement
of sale, is an afterthought. In the case of this change of ownership there
was also a written agreement, which was again signed for both parties
by Manfred Kapp, and Manfred Kapp alone. Thus both transactions,
the purchase of Humber Typewriters by Evermac from Pearlsound and
its sale by Evermac to Commodore Business Machines for a mark-up of
$62,400, were completed on the same day, and Evermac paid off a debt
to Commodore Sales Acceptance in the amount of $66,387.87, a portion
of a debt to John Frame & Co. of $29,500 incurred by the purchase
of 10,000 shares of Commodore Business Machines at $4.80 a share,
and $2,600 to Humber Typewriters. There is no minute of any meeting
of the directors or shareholders of Commodore Business Machines
approving of the purchase of Humber Typewriters.
Evermac continued to own Pearlsound until April 9, 1965, when
it agreed to sell it to Commodore Business Machines according to a
contract signed, as usual, by Manfred Kapp for both parties, at a price of
$70,000, payable by the issue of 7,500 shares of Commodore Business
Machines from the treasury. Attached to it is an interim financial state-
ment of March 31, 1965, showing that, as at June 30, 1964, there was
capital invested of $50,000, and a deficit of $65,093.34 wiping out all
of Pearlsound's capital, but a profit of $28,569.30 in the interim period,
leaving a net equity position on March 31, 1965 of approximately
$13,500.7
It is difficult to know where to start when commenting on these
transactions, and certainly when they were put to Jack Tramiel he was
unable to make any sense of them, falling back on his standing justifica-
tion that what Morgan wanted he and Kapp did, that he was not really
sure what Morgan was doing but that, since Commodore Business
Machines was helpless without Morgan's goodwill, everything had to be
•Exhibit 326.
•Exhibit 2247.
'Exhibit 337.
409
Commodore Business Machines
done as he directed. He admitted that he and Kapp had been consider-
ing the purchase of Humber Typewriters before it was made. He was
always looking for retail outlets of which Humber Typewriters had
several in Toronto, and he said that Humber had originally been in-
tended for Commodore Business Machines, but the board of directors
of that company decided that the purchase should not be completed,
because it evidently considered that the purchase of the Willy Feiler
plant, then under negotiation, had priority over other ventures, and fully
taxed the resources available to Commodore Business Machines at the
time. It was characteristic of Tramiel that in this case, as in the later ,
and far more substantial purchase of Willson Stationery & Envelopes^
Limited, he would not accept a majority decision of the board when it
was not in accordance with his own views, and the various changes of
ownership which eventually brought Humber Typewriters under the
direct ownership of Commodore Business Machines, and which involved
purchases of one Tramiel and Kapp company by another with unjustifi-
able increases in price, were as difficult for him to explain as they were
easy at the time to transact. He said that he recollected telling the board
of Commodore Business Machines that Humber Typewriters had been
bought by Pearlsound in July 1962 for $106,000, but he could not ex-
plain why the purchase by Evermac of Humber Typewriters from Pearl-
sound for $111,600, and its sale to Commodore Business Machines for
$175,000, were apparently closed on the same day. Pearlsound, a dealer
in radio and gramophone equipment largely imported by another com-
pany known as Pro Musica Limited, another heavy borrower from
Atlantic companies, had a staff of salesmen operating across Canada
and this fact alone, as Tramiel said, made the purchase of the company
attractive to him. Why Morgan would lend money to Pearlsound to buy
Humber Typewriters, rather than to Commodore Business Machines for
the same purpose, he was unable to say. He maintained that he had told
the directors of Commodore Business Machines that their company was
purchasing Humber Typewriters from Evermac, but was unable to ex-
plain why there were two sets of minutes of the meeting of the board of
directors dated April 17, 1963, one dealing with the authorization of
the purchase of the Willy Feiler concern only, and the other containing
material dealing with the purchase of Humber Typewriters from Ever-
mac, and inserted out of place in the minute book. Both of these sets of
minutes were apparently complete, and both were signed by Morgan as
chairman and Kapp as secretary, but, on being pressed on this subject,
Tramiel merely said that the Commission would have to seek assistance
from the company's solicitors. Similarly he was unable to explain why
the minutes of a meeting of April 7, 1965, recording the attendance of
Morgan, Kapp, King, Solomon, Medland, Wagman, Goodfellow, Greg-
ory and himself, and dealing fully with the purchase of Pearlsound by
410
W l/J'tl/sofl. £fat<ofccrs -f ^nu^lope^
Chapter VIII
Commodore Business Machines, were unsigned and were also out of place
in the minute book.
The Commission availed itself of the opportunity to seek an explan-
ation from the company's solicitors as to the existence of two apparently
complete and executed sets of minutes for the meeting of the board of
Commodore Business Machines dated April 17, 1963, and Irwin Singer,
who was responsible for drawing the minutes at this period, testified on
the subject on March 20, 1967.8 He suggested that these were really two
copies of the same set of minutes, and that reference to the acquisition of
Humber Typewriters in the second copy was accidentally omitted from
the first. This did not explain to his satisfaction, or indeed to mine, why
both copies should be in the minute book, the second, which contained
the Humber material, being inserted in a portion dealing with business
in 1965. He said that the statement in all the minutes, that those of the
previous meeting had been read and directed to be signed, was just a
formality; that this in fact was not done, and that he only sent them in
due course to the secretary of the company, when drawn, to have them
executed. On this point Kapp had said that, as secretary of the company,
he did not circulate the minutes of the previous meeting before a cur-
rent meeting for the purpose of having them approved, but did send out
copies to directors after they had been signed. Singer agreed that, if
there was evidence that one of the directors present did not know
about the purchase of Humber Typewriters from Evermac by Commo-
dore Business Machines, the existence of these two sets of minutes
would be difficult to explain as being wholly inadvertent. Such a
director was Aubrey Medland, who recalled clearly being present at the
meeting of April 17, 1963, which dealt with the completion of the pur-
chase of Willy Feiler, and was certain that he did not know about the
purchase of Humber Typewriters. Medland did recall the acquisition of
Pearlsound, and Morgan stating, as a reason for this, that it was owned
at the time by Tramiel and Kapp who should be spending all their time
on the affairs of Commodore Business Machines and its subsidiary com-
panies. Morgan added that Pearlsound was the only outside interest of
Tramiel and Kapp.9 Carman King, on the other hand, felt that the board
of directors of Commodore Business Machines had approved of the pur-
chase of Humber Typewriters, and that it agreed with the recommenda-
tions made by Tramiel and Kapp, supported by Morgan, on this occasion.
He could not, however, recall any discussion about any of the directors
having an interest in Evermac, although the second set of minutes con-
tains a declaration of interest by Tramiel and Kapp to this effect. King
also said that he recalled the transaction of business dealing with the
acquisition of a 50% interest by Commodore Business Machines in a
"Evidence Volume 106.
•Evidence Volume 92.
411
Commodore Business Machines
company called International Typewriters Inc. in the United States, an-
other matter which Medland had not heard about, but did not realize
that this 50% interest was in fact being acquired from Jay-Man Distrib-
utors Inc., manifestly a Tramiel and Kapp company, and that the dis-
cussion during the meeting of the board made no reference to it. The
fact that both sets of minutes for the directors' meeting of April 17, 1963
were signed, and both preserved, is difficult to explain on any other
grounds than the need to be able to produce both of them on occasion
but never at the same time. It is probable that it was not the purchase of
Humber Typewriters, as such, which inspired this wretched stratagem, but
the fact that it was acquired from Evermac, a company owned by Tra-
miel and Kapp, which had acquired it from Pearlsound of which Tramiel
was president, and that Pearlsound had acquired it, in the first place, at
a time when the board of Commodore Business Machines had considered
the expenditure unwarranted.
Subsequent History of the Quick Adding Machine Rights
The sale of the rights to distribute the Quick adding machine in
North America by Commodore Industries Limited, a Jamaican com-
pany, to Commodore Portable Typewriter, in a manner contrived to ex-
tinguish the personal liability of Tramiel and Kapp, has already been
refrered to in connection with the first prospectus of Commodore Business
Machines.1 Manfred Kapp's evidence about this transaction was given
at great length, and the following extract describes the first transfer:2
"Q. We were discussing the contract with Typewriter Sundries relating
to the Quick Adding Machine rights, and I direct your attention to a
minute, the 3rd July, 1961, in this same minute book, Exhibit 322,
wherein a contract is authorized to be entered into between Commodore
Portable Typewriters and Commodore Industries Limited of Jamaica,
which contract is attached to the minutes. And I direct your attention to
a reference in that contract, 'Agreement with Typewriter Sundries Com-
pany Limited, a company incorporated under the laws of the United
Kingdom, dated 15th June, 1961, a copy of which is annexed hereto and
marked Schedule A.'
Can you assist me if the agreement referred to is the agreement
whereby Typewriter Sundries shifted the North American rights to the
Quick Adding Machine to Commodore Industries Limited?
A. Yes, this is the contract.
Q. Do I understand, then, while your discussions with Mr. Markus took
place in October, 1960, you have testified that some months elapsed
before a formal agreement was entered into; is that correct?
A. Yes, that is correct.
3pp. 344-6.
•Evidence Volume 88, pp. 12006-10.
412
Chapter VIII
Q. Can you state where the agreement is, it is not in fact attached to
the minutes?
A. I couldn't help you, sir.
Q. Why was this North American right granted by Typewriter Sundries
to Commodore Industries Limited of Jamaica instead of to Commodore
Portable Typewriters direct?
A. At the moment I don't recall why the reasoning was to put it in
Commodore Industries.
Q. Commodore Industries Limited of Jamaica was owned by yourself
and Mr. Tramiel, was it not?
A. That is correct.
Q. Did Commodore Portable Typewriters ultimately pay Commodore
Industries Limited for the acquisition of these rights?
A. They took them, Commodore Industries.
Q. Did they pay the $100,000 to which the contract refers in its pro-
vision that Commodore Portable Typewriters may acquire the right to
the Quick Adding Machine possessed by Commodore Industries Limited
absolutely on the payment of $100,000?
A. I don't believe there was payment of $100,000. If I can recollect
Commodore Portable Typewriters took over Commodore Industries for
the debt existing at the time, which had been acquired by expenditure
for the company in Jamaica.
Q. Do I understand that Commodore Industries Limited owed money to
Commodore Portable Typewriters, and Commodore Portable Type-
writers gave credit to Commodore Industries Limited against that debt
in turn for the unfettered acquisition of the Quick Adding Machine
right?
A. If you maybe explain to me unfettered?
Q. Without any lien or further right of Commodore Industries Limited
to be able to deal with Quick Adding Machine rights?
A. Yes, absolute right.
Q. Absolute right. And approximately when was this done?
A. Some time after that contract. I couldn't tell you offhand when it
was done.
Q. My recollection, without taking the time to look at the books, is it
was in December, 1961. Does that agree with your recollection?
A. I can look it up, if you wish, and try to find out.
Q. Now, you said Commodore Portable Typewriters took over Com-
modore Industries Limited. Do you mean they took over the Quick
Adding Machine from Commodore Industries Limited?
A. Took over the rights and whatever was there at that particular time.
Q. The assets of Commodore Industries Limited?
A. Yes, the assets, that is correct.
413
Commodore Business Machines
Q. Are you able to assist us further why, when you negotiated this
matter with Mr. Markus, you did not cause these rights to be made to
Commodore Portable Typewriters, or have you told us everything you
can on that point?
A. Well, at the time that the negotiations started — I would like to men-
tion the reason I did go to Paris to look for Mr. Markus when we were
aware of the existence of this machine. And Mr. Tramiel had a couple
of years before some discussion with Mr. Markus who told him this
machine was being created. And during that whole period the company
was wholly owned by ourselves.
Q. You mean during this earlier period?
A. During this earlier period up to October of 1960.
Q. Yes?
A. Commodore was owned by Tramiel and Kapp and by our families.
And this is probably the reason we decided to take this over ourselves.
Q. Were your fellow directors of Commodore Portable Typewriters
aware when they authorized the entering into of this contract in July,
1961. that Commodore Industries Limited was owned by yourself and
Mr. Tramiel?
A. I am fairly certain that they were aware. I believe our directors knew
what we were doing.
Q. And did they approve of this transaction? I take it obviously they
did, it is in the minutes. Is that your answer?
A. That is correct.
Q. Now, Commodore Portable Typewriters now has these rights, what
did Commodore Portable Typewriters do with them?
A. Commodore Portable Typewriter imported the machines, bought
machines and sold the machines in North America."
It will be recalled that the amount of the debt owed by Commodore
Industries to Commodore Portable Typewriter, of which the travelling
expenses of Jack Tramiel was an ingredient, was $92,098.3 It may also
be noted that the only corroboration of the statement that the rights to
sell the Quick adding machine were originally acquired by Commodore
Industries, and not by Commodore Portable Typewriter, would be the
missing agreement between the former and Typewriter Sundries, referred
to in the minutes of July 3, 1961.
Counsel then put to the witness a contract, dated May 10, 1963,4 by
which Commodore Business Machines Inc., the New York State sub-
sidiary, purported to sell to a company called A.C.E. Business Machines
Inc. certain assets for $410,000. These were said to be described in
Schedule "A" annexed, but this part of the partially executed document
•Exhibit 346.
'Exhibit 916.2.
414
Chapter VIII
is missing; Kapp said that the assets consisted of the rights to manufac-
ture the Quick adding machine and certain tools and parts. He was not
able to explain how Commodore Business Machines Inc. acquired the
manufacturing rights which had not been conferred on its Canadian
parent, other than to make vague references to an oral agreement with
Markus in England. Little is known about A.C.E. Business Machines
Inc., except that it was not a subsidiary of Commodore Business Machines
but was apparently owned by Thomas McGourty, an employee of that
company. Commodore Factors lent A.C.E. $410,000 in June of 1963,
evidently for the purpose of making this purchase. The loan bore interest
at 12% per annum and it was afterwards, on June 30, 1964, transferred
to Baronet Associates, which thereafter charged A.C.E. only %rA %. At
the time Commodore Factors made the loan to A.C.E. it charged that
company with $410,000 and credited Commodore Business Machines
Inc. with the same amount, by journal entry in its own books. A further
reference must be made to the outcome of this transaction.
There were then two documents missing which are vital to these
transactions: the agreement which was referred to in the minutes of
Commodore Business Machines between Typewriter Sundries and Com-
modore Industries Limited, the Jamaican company, and Schedule A of
the agreement, dated May 10, 1963, effecting the sale to A.C.E. Business
Machines Inc. of certain assets for $410,000, in which those assets, if
they existed, must have been described. It is very likely that the former
document does not exist, and that if the latter does it would reveal assets
for which the price of $410,000 was manifestly absurd. Indeed, this
transaction between the American subsidiary of Commodore Business
Machines and McGourty's company was apparently arranged for the
edification of the Irish government, which required an investment of
£150,000 in any company which sought to qualify for the benefits of
the Shannon Free Port Development, repayable only out of profits. Had
this sale been of substance and in good faith, one might have expected
to see it reflected in the consolidated financial statements of Commodore
Business Machines for the year ended June 30, 1963 as a non-recurring
item of sales, but this is not the case. Nearly a year later, on April 2,
1964, these highly intangible and inflated assets, including, according to
Kapp, the right to manufacture and sell the Quick adding machine in
Ireland and perhaps the British Commonwealth, were sold for a total of
$435,000 to ACE Industries Limited, an Irish subsidiary of Commodore
Business Machines which had been incorporated on December 18, 1963,
and the name of which was changed on July 27, 1964 to Commodore
Industries Limited.5 Again no money changed hands.
Counsel next returned to the affairs of the Jamaican company, and
put to the witness a journal entry in the general journal of Commodore
"Exhibit 916.
415
Commodore Business Machines
Business Machines,6 made as at June 30, 1963, recording the transfer of an
indebtedness to Commodore Business Machines by Commodore Indus-
tries Limited of Jamaica — specifically "C.I.L. Jam. to C.B.M. Canada
Limited" — in the amount of $92,187.32 to the Willy Feiler company
in Germany. The journal entry concludes "Willy Feiler GmbH has pur-
chased the rights held by C.I.L. for an amount equivalent to C.I.L. com-
plete indebtedness for the purpose of being able to comped (sic) in the
Canadian and American markets with its parent company C.B.M. Mr.
Kapp has stated that such purchase agreement has been confirmed by
meetings of the board of directors in West Germany". Kapp was now
confronted with a dilemma.7
"Q. Now, when Willy Feiler paid pursuant to that journal entry, by an
assumption of debt the sum of $92,000 for the rights from Commodore
Industries Limited, what rights did it acquire?
A. Well, it would appear here to look — I don't know exactly — remem-
ber the details — that the rights from Jamaica went over to C.I.L. and
which is, C.I.L. being in this case, Commodore Industries Limited.
Q. I suggest not, Mr. Kapp. Is it not correct that (a) Commodore
Industries Limited, that is to say the Irish company as it ultimately be-
came, had not been incorporated, and the reference is to C.I.L. Jamaica,
written 'C.I.L. Jam.' Is that not correct?
A. Yes. It says Jamaica.
Q. Yes. What rights did Commodore Industries Limited (Jamaica)
have in June, 1963, which they conveyed to Willy Feiler for $92,000?
A. I don't know. I suppose this must be all part of the original rights.
Q. But the original rights, I thought, Mr. Kapp, we had agreed, were
conveyed to Commodore Portable Typewriters and paid for by Com-
modore Portable Typewriters.
A. Yes. By forgiveness of the indebtedness. Apparently when we look
at the entry over here (indicating) it appears that eventually Willy Feiler
took over and settled the debt. That is the same debt, that appears to be
the same debt. I can only — looking at the entry to refresh my memory —
because it does say here (indicating) a credit to advances to Jamaica.
Q. Yes. Would it not appear — go ahead.
A. As I stated before, Commodore Portable Typewriter took over by
wiping out the debt from Jamaica, and this is probably the entry that
then took place to wipe out this debt.
Q. I thought that your earlier testimony was that, Mr. Kapp, to the
effect that, Commodore Portable Typewriter acquired all the rights
which Commodore Industries Limited (Jamaica) had and paid for them
by forgiveness of debt. So that Commodore Industries Limited thereafter
had no rights.
'Exhibit 2131.
Evidence Volume 88, pp. 12027-9.
416
Chapter VIII
Now, it appears by a journal entry, that on 30th June, 1963, Willy
Feiler assumed $92,000 worth of debt of Commodore Industries Limited
in exchange for rights which Commodore Industries Limited does not
appear to have. Can you clear up this confusion for me?
A. Well, it is probably the same debt that hadn't been wiped out. I did
say that the company ceased operation to my recollection in early 1961.
Q. Yes.
A. I also said that Commodore absorbed by wiping out the debt. Well
then, this is the debt, but apparently went for some reason to Willy
Feiler, who also at the time was a wholly-owned subsidiary."
Then the witness was shown a journal entry of December 31, 1961
which Commodore Portable Typewriter recorded as follows: "To record
purchase of patent rights, franchises, etc. from Commodore Industries
Limited (C.I.L.) Jamaica as per agreement. Included in the above deal
are all the original intangible assets and plans and processes together
with franchises on the sale of adding machines for which Jamaica has
recently received the contract." The value of these rights, which cannot,
in view of the express terms of the journal entry, be judged to exclude
rights to the Quick adding machine, was stated to be $147,000. The
financial statement of Commodore Business Machines, as at June 30,
1962,8 none the less recorded the fact that Commodore Industries Limited
owed Commodore Business Machines the sum of $92,098, and it is for
this amount, plus a few dollars, assumed by Willy Feiler, that the rights
to the Quick adding machine were again disposed of in June 1963 by
the same transferor. Kapp's only explanation of the fact that these rights
had now been sold at least twice, and perhaps three times, was to specu-
late that they must have been excluded from the first purchase in Decem-
ber 1961. He was quite unable to explain why Willy Feiler, by that time
a wholly-owned subsidiary of Commodore Business Machines, should
need to acquire rights which had originated with it, and had been previ-
ously acquired by its parent. The third and fourth transfer of rights to
the Quick adding machine, the effect of the transfer of additional assets
the record of which has mysteriously disappeared, and the relationship
between Commodore Business Machines and the Irish Government were
put by counsel to the witness as follows:9
"Q. Let me put it to you this way. I suggest that Commodore Business
Machines Incorporated in May, 1962, (sic for 1963) recorded the sale of
certain assets to A.C.E. Business Machines for $410,000. You have told
us that these assets consisted in tools and parts, and also the fruit of an
oral arrangement made with Mr. Markus relating to the manufacture and
distribution of the Quick Adding Machine. Is that correct?
A. Yes.
•Exhibit 174.
'Evidence Volume 88, pp. 12036-9.
417
Commodore Business Machines
Q. A.C.E. Business Machines then, of course, owed $410,000 to Com-
modore Business Machines Incorporated, is that correct?
A. Correct.
Q. A.C.E. Business Machines in the following year sold the same rights
under this oral arrangement, plus some machines and parts, to ACE
Industries (Ireland) for the same $410,000 plus the interest that had
accrued thereon?
A. And expenses.
Q. Yes, and the effect of that was that ACE Industries (Ireland) now
owed Commodore Business Machines Incorporated $410,000, plus the
interest thereon, is that correct?
A. Correct.
Q. Then I suggest to you that Commodore Business Machines (Canada)
Limited recorded an investment of an aggregate of $410,000, plus the
interest, in ACE Industries Limited of Ireland and forgave the indebted-
ness of the Irish company, is that correct?
A. Essentially that is correct.
Q. And in order to obtain certain rights to which Mr. Tramiel referred,
from the Irish Government, Commodore Business Machines (Canada)
Limited was required to invest in its Irish subsidiary 100,000 pounds by
way of invested capital and 54,762 pounds which could be by way of a
loan, without pinning you down to the precise number of pounds. Is that
correct?
A. Well, no, the $100,000—100,000 pounds, pardon me, had to be
invested.
Q. Yes?
A. The differential of the loan was to bring it up to the figure you had
referred to, $410,000, plus, which Ireland had to pay. Consequently the
investment of Commodore —
Q. When you say Ireland, the Irish subsidiary?
A. Irish subsidiary had to pay back in order to come back to Com-
modore.
Q. This was the method whereby Commodore Business Machines
(Canada) Limited got its investment of $435,000 (in round figures) in
the Irish subsidiary, is that correct?
A. Correct.
Q. One additional advantage, I put to you, of this series of transactions
is that when Commodore Business Machines Incorporated in May,
1962, sold to A.C.E. Business Machines whatever rights it had acquired
as a result of the oral agreement with Mr. Markus, it received $410,000
which, of course, increased the sales and therefore the profit of Com-
modore Business Machines (Canada) on a consolidated basis?
A. Probably."
418
Chapter VIII
The purpose of the two sales by the Jamaican company of the same
rights, the second occurring long after it had ceased to do business, and
the assumption by the Willy Feiler subsidiary of the Jamaican company's
debt of slightly over $92,000 to Willy Feiler's parent company, was not
revealed by Kapp's attempts to explain them, but that it was improper
there can be little doubt. There is likewise little doubt that the company's
favourite device of including in the records of their sales non-recurring
items without explanation was here successfully applied. That the
Irish government, which conferred valuable exemptions from duty on
Commodore Business Machines' Irish subsidiary, was under a misappre-
hension as to the amount and nature of the parent company's investment,
may be putting it too mildly. After the transfer of its loan owed by
A.C.E. Business Machines to Baronet Associates on June 30, 1964,
Commodore Factors paid $435,000 to Commodore Business Machines
Inc., which put the account back into a debit position for the first time
since the latter had been credited with $410,000 the year before. Com-
modore Business Machines Inc. thereupon paid the $435,000 to Com-
modore Business Machines (Canada) Limited, which deposited it with
Commodore Factors as a "special account" and received 8 Vi % per
annum on the money; then it set up the investment in the Irish subsidiary
by crediting Baronet Associates with the same amount, and Baronet in
turn credited A.C.E. Business Machines, to extinguish its debt and com-
plete payment for the latter's sale to the Irish company.
Analogue Controls Incorporated
One company, subsidiary to Commodore Business Machines, al-
though never wholly-owned, and disposed of some nine months before
the collapse of Atlantic Acceptance, must be the subject of examination
in detail, because its affairs played an important part in the history of
Commodore Business Machines and its relationship with Atlantic Accept-
ance, and provided Morgan with the means to make his most carefully
planned and successful coup in the stock market, in which he again
sought the assistance of Frank Kaftel and the shelter of the Bahama
Islands.
Analogue Controls Inc. was incorporated in the State of New York
on November 8, 1954 for the purpose of manufacturing electronic equip-
ment, particularly switches and a type of voltage measuring device called
a potentiometer, for which it was awarded in due course a contract from
the government of the United States of America. Its manufacturing
facilities were at Hicksville, N.Y. on Long Island, and it was in the un-
usual position of having shares listed for trading on the Toronto Stock
Exchange, and on that exchange only. The books and records of the
company, now bankrupt, were, when examined by Mr. Gillman, in the
419
Commodore Business Machines
hands of its trustee and of law enforcement authorities of the State of
New York, and have never been in the custody of this Commission. Had
it been otherwise, many details of a formal and historical nature would
have been readily available but, as it is, the early history of the com-
pany must be considered only in passing. The link with Atlantic
Acceptance was again the knowledgeable and ubiquitous Carman G.
King, who in 1956 was with Gairdner & Co. in New York, and to him
came L. Sanford Reis with a proposal for the public financing of Ana-
logue Controls. Gairdner & Co. underwrote the first public issue of its
securities, and secured a listing of its common shares on the Toronto
Stock Exchange which were first called for trading on May 31, 1957.
This was accomplished, according to King, after the company had ex-
hibited twelve months of modest profits in the manufacture of potentio-
meters, and thereafter its record was not notably successful. King's friend
and customer, Alan Christie, was an early subscriber, and in due course
Wilfrid P. Gregory and British Mortgage & Trust Company took shares.1
Although Mr. Gillman was able to inspect the books of account of
Analogue Controls, the company's trustee in bankruptcy refused him
access to its other corporate records. An inspection of the minute books
was, however, carried out by the United States Securities and Exchange
Commission, and from the information supplied it would appear that
Reis and his associates were the early promoters, one Karl Birken was
the president and operating head, and King was an early director.
Trouble started, according to King, when Birken was succeeded as
president by E. J. Garrett who involved his company in the manufacture
of gas bearings, a business in which a small concern like Analogue could
not successfully compete with the large manufacturers. In 1958 King
joined Annett & Co., and in 1960 this firm was responsible for an addi-
tional underwriting. By 1961 there were 413,280 common shares issued
out of a total of 700,000 authorized, on which no dividends had been
paid and very little earned, and 713 preference shares out of 1,000
authorized at a par value of $ 1 per share.
At the end of Analogue's fiscal year on October 31, 1961, the direc-
tors of the company were L. Sanford Reis, who was chairman of the
board, Fenimore Fisher, who had replaced Garrett in charge of oper-
ations, Karl Leubsdorf, Karl Birken, Thomas B. Flynn and Carman G.
King, the last being the only Canadian director. Of these, by the end of
the same period in 1962, only Fisher and King remained, the former
having become president of the company, and the new directors were
C. P. Morgan, who became chairman of the board, Jack Tramiel and
Manfred Kapp. This change was a result of the purchase by Commodore
Business Machines Inc. of 202,500 shares of Analogue Controls in the
course of the year, and occurred shortly after the first public issue of the
1Evidence Volume 46.
420
Chapter VIII
shares of the purchaser's parent company on the Canadian Stock Ex-
change. It coincided with a determined effort on the part of Annett &
Co., and particularly Carman King, to dispose of Analogue Controls in
such a manner as to salvage something of consequence for the many cus-
tomers of the firm who had been induced to purchase its shares. These
sold as high as $10 per share in 1959, but for the month of July, 1962
traded at a high of $1.50 and a low of $1.30 per share. King testified
that he and his associates had been looking for a purchaser at a level of
$1.30 per share. At the time Commodore Business Machines was im-
porting and selling a copying machine from West Germany, and finding
duty and shipping costs so high, and the necessity of making voltage
adjustments for the North American market so expensive, the board
of directors was amenable to a suggestion by Tramiel that the company
could manufacture the machine itself. The lack of staff and production
knowledge were stumbling blocks until King suggested that Analogue
Controls would be interested in manufacturing the machine; whereupon
Tramiel called upon Fisher, surveyed the plant at Hicksville, and at the
next meeting of the board of Commodore Business Machines suggested
ordering 10,000 of the German machines for adjustment, at least, by
the Analogue staff. Upon King's recommendation that Commodore
Business Machines should have an interest in Analogue, it was decided
to buy control of the company. Needless to say, the part played by King
in Tramiel's evidence appears to be much more active than in that of
King himself, but there is no doubt that King was anxious to secure a
buyer for the Analogue shares, and his position on the board of Commo-
dore Business Machines provided a favourable opportunity under cir-
cumstances which appeared to confer a benefit upon both parties.
Analogue Controls, at the time when this purchase was made, was
no bargain. In 1960 it had shown a loss on operations of $454,328, in
1961 of $13,738. Although at the year ended October 31, 1962 its
financial statements exhibited a net profit of $4,976, it was in a deficit
position of $470,772.07, and this situation prevailed in the two following
years during which Commodore Business Machines had control of the
company by virtue of its holdings in common stock.2 The shareholders
of Analogue were, according to King, discouraged by the performance of
the company and of its shares on the exchange. Annett & Co. concen-
trated on its own customers, and they, with others, were the principal
beneficiaries, as will be seen, of the complicated transaction which then
ensued.
Commodore Business Machines Inc. Acquires Shares in 1962
On August 24, 1962 Commodore Business Machines Inc. of New
York bought 181,200 shares of Analogue Controls, at $1.20 per share,
through Annett Partners Limited for a total price of $221,970. Payment
'Exhibits 2378-81 and Table 44 (Exhibit 2384).
421
Commodore Business Machines
was not made for this purchase until October 12, and then by a cheque
from Commodore Business Machines (Canada) Limited.1 A handwrit-
ten list, taken from the files of Annett Partners Limited,2 shows the names
of the individual vendors of these shares, among which are the Bank of
Nova Scotia which sold 81,900 shares on behalf of customers in New
York, the Bank of Montreal in two accounts which disposed of 5,000
shares, Carman G. King 825 shares, James E. McConnell 18,900, British
Mortgage & Trust Company 12,000, Alan Christie 22,400, his wife,
3,850, his daughter 2,000 and W. P. Gregory 2,100. On September 7,
500 shares were bought at $1.75 per share for a total of $887.50 and
20,800 shares at $1.80 for $37,960. The money required to pay for the
181,200 shares and the 20,800 shares was received by Commodore
Business Machines in two cheques from Aurora Leasing Corporation,
one dated September 14 for $37,960 and the other dated October 12
for $224,402.50, the shares being lodged with Aurora as security.3
Aurora obtained most of the money which it lent from British Mortgage
& Trust Company, from which it borrowed $250,000, the managing
director of the trust company writing to the chairman of the board of
Commodore Business Machines in the following terms on January 3,
1963:4
"Dear Powell:
I am enclosing herewith our cheque for $250,000 representing a three
month loan at 7% to Aurora. This loan is to be secured by a 125%
collateral to be placed in the hands of Carl Solomon as Trustee for us.
Very best regards for the new year.
Yours sincerely,
Wilf"
Aurora charged Commodore Business Machines 10%, and the only
security pledged with Carl Solomon by the latter was Commodore Busi-
ness Machines' note to Aurora for $224,402.50 in respect of the 181,200
share purchase, which was neither 125% of the amount lent nor, as it
happened, a constant security, since it diminished as the note was paid
off. It is sufficient to note Gregory stated in evidence that he would have
preferred to have another trust company as trustee, but that he acceded
to Morgan's suggestion that Solomon should act.5 This assertion must
be weighed against the apparent advantage of having a trustee who could
be relied upon to do what he was told, without questioning the motives
of either Morgan or Gregory, and who was familiar with the situation of
Aurora and Commodore Business Machines. None of the shares of Ana-
logue Controls were lodged as security with British Mortgage & Trust or
Exhibit 2385.
'Exhibit 2387.
"Exhibits 2388 and 2390.
♦Exhibit 2393.
8 Evidence Volume 116.
422
Chapter VIII
with Solomon, in spite of the deficiency of the Commodore Business
Machines note with respect to even 100% of the loan, but were kept in
a safety deposit box at the Guaranty Trust Company of Canada for the
benefit of Aurora.6
The 20,800 shares of Analogue Controls sold to Commodore Busi-
ness Machines Inc. at $1.80 per share through Annett Partners on Sep-
tember 7 came from Valley Farm and Enterprises Limited and, according
to its books,7 are shown as having been purchased on September 30 at a
price of $1.50 per share for $31,200, the vendor being identified as
Aurora Leasing Corporation. Aurora's books8 record the purchase of
the same number of Analogue shares from Maris Investments Limited,
a holding company for Earl A. Glick, at the same price on August 24,
payment being credited against an outstanding loan from Maris to
Aurora. Its account at Annett Partners Limited recorded the sale by
Valley Farm on September 7, at a price after brokerage of $36,868 at
$1.80 per share, creating a profit for Valley Farm of $5,668 in cash. The
same records show that the vendors of the block of 181,200 shares re-
ceived cash on October 12 in the amount of $221,970, and on October
15 recorded a payment of $212,272.16 to Valley Farm shown as a
credit balance in its account. The realities of this transaction are dis-
closed by the same account showing that Valley Farm delivered 72,480
shares of Commodore Business Machines on August 27, which were in
fact exchanged for the 181,200 shares of Analogue Controls assembled
by Annett Partners, giving a value to the shares of Commodore Business
Machines of $3 per share, and of Analogue Controls of $1.20 per share,
an exchange ratio of one share of the former to two-and-a-half shares of
the latter. The shares supplied by Valley Farm were a part of 200,000
purchased from Dallas Holdings on July 16 in the course of the Barrett,
Goodfellow & Co. underwriting. For these it paid $2.35 per share or
$175,328 for the shares delivered to Annett Partners, making a profit
of $41,944.16, and a total profit in respect of these and of the 20,800
shares of Analogue Controls of $47,612.16.
Valley Farm and Enterprises paid for the shares purchased from
Dallas Holdings by assuming a debt of the latter owed to Aurora Leas-
ing. On October 1 it, in its turn, borrowed $125,000 from Aurora, and
on October 29 borrowed a further $250,000 from Adelaide Acceptance.
With these sums and its credit balance at Annett Partners it disposed of
upwards of $587,000 and paid out $549,000, some to brokerage ac-
counts, lent C. P. Morgan $75,000 with which to purchase shares of
Arcan Corporation Limited and bought from him, through Jenkin, Evans
&Co., a debenture of Phantom Industries Limited for $127,761.88. This
6For a fuller account of the Solomon trusteeship and the security pledged see Chapter
XV, under the sub-heading " 'Secured Notes' of Aurora Leasing: Carl Solomon as
Trustee."
'Exhibit 1259.
"Exhibit 929.
423
Commodore Business Machines
last acquisition was, in due course, simply charged off to expense, much as
if it were a payment for municipal taxes, and must constitute one of the
more barefaced accounting irregularities committed by the Trio, among
their many high-handed and dishonest activities. Finally, on October 26,
$25,000 of these funds were paid into the Toronto-Dominion Bank to
the credit of "Directors' Loans". Nothing was ever repaid to Aurora
Leasing, and nothing at this time to Adelaide Acceptance. Thus, on the
acquisition of a commanding, if not yet a controlling interest in Ana-
logue Controls by Commodore Business Machines, which treated the
purchase price as having been lent to its subsidiary Commodore Business
Machines Inc. and forgave the loan for the shares, Aurora supplied all
of the money used, having borrowed it, and slightly more, on more
advantageous terms from British Mortgage & Trust Company which
took less security than Aurora held; Valley Farm and Enterprises re-
ceived all the cash, and laid off to members of the public a large number
of the Commodore Business Machines shares which it had acquired in
the so-called public underwriting of July 1962; vendors of 181,200
shares of Analogue Controls got Commodore Business Machines shares
at a rate of one for two and a half supplied, and C. P. Morgan personally
profited from using money in Valley Farm to buy his interest in Arcan
Corporation, and to dispose of the Phantom Industries debenture.
Jack Tramiel maintained in his evidence that he did not know
about the exchange of shares, and the fact that the Analogue Controls
shareholders had not been paid cash by Commodore Business Machines,
and had only learned about it through Sanford Reis, then chairman of
the Analogue board, who told him that he had built a "Commodore"
house in Florida out of the profit made on Commodore Business
Machines shares. He did not remember receiving any communication
from Annett & Co., but recalled buying his Analogue stock at $1.80
per share. When Carman King testified,9 in June 1966, he was inclined
to feel that Tramiel may not have known this, and consequently had no
opportunity to consider the alternative of issuing treasury stock. On re-
flection, when he testified in December of the same year,10 he felt that
Tramiel must have known, since he recollected discussions between Tra-
miel, Morgan and himself, that Gregory must also have known about the
transactions, since he exchanged his own shares of Analogue, and that per-
haps all the members of the Commodore Business Machines board, except
Medland, knew exactly what was afoot. However that may be, there was
no record of an exchange of shares having been discussed at any meeting
of the board of Commodore Business Machines; indeed King said that
it was not discussed other than privately. King had been having difficulty
in persuading the Analogue shareholders with whom he had made con-
tact, particularly the New York group headed by Reis, to sell at $1.20
"Evidence Volume 46.
"Evidence Volume 93.
424
Chapter VIII
per share, and it was at Morgan's suggestion, according to him, that the
opportunity was given of sharing the fortunes of Commodore Business
Machines which proved more attractive. The whole idea, when looked
at with all its ramifications, is so typical of Morgan's unconscionable
inventiveness, it could hardly have originated with anybody else. Tramiel
may be given credit on this occasion for having his company's manufac-
turing problems principally in mind.
The Purchase of Control by Commodore Business Machines (Canada)
Limited in 1963
A further acquisition of the shares of Analogue Controls was made
by Commodore Business Machines (Canada) Limited in 1963, involving
130,000 shares of its treasury stock which were purchased for 80^
apiece. This was financed in part by a loan of $50,000 U.S. funds given
by the Franklin National Bank of Franklin Square, Long Island, N.Y.
at 6% per annum, to be repaid at a rate of $10,000 per month, and for
which 130,000 marketable shares of Analogue were to be pledged. To
make an issue of treasury shares in the United States would have re-
quired delivery of a prospectus, unless the purchaser bound itself to keep
the shares for investment only. The Franklin National Bank was appar-
ently not aware of the fact that, once the Ontario Securities Commission
had waived the requirement of a prospectus and the Toronto Stock Ex-
change had agreed to the transaction, the shares were immediately
marketable here. Such an application was in fact successfully made1 on
October 29, 1963, and the Toronto Stock Exchange approved. In any
event, Oremland had written to the Toronto Stock Exchange on October
28, assuring it that the sale by Analogue Controls of these shares to Com-
modore Business Machines was required to raise additional permanent
capital. The additional purchase was made by the latter "for investment
purposes only"2 and Carman King had advised William B. Lewis, Jr.,
president of the Franklin National Bank, on October 24, that Commodore
Business Machines was prepared to pledge with the bank 130,000 shares
"which they had purchased on the open market and which therefore
would have no investment conditions attached".3 The problem was re-
solved, with characteristic regard for the security of Atlantic and British
Mortgage loans, by taking 130,000 of the 202,000 shares in the safety
deposit box at Aurora Leasing for which was substituted a receipt dated
January 10, 1964 signed by Tramiel.4 A box count taken on January
15, 1964 contained the observation that Aurora had 75,000 shares of
Analogue Controls, and that 130,000 had been taken from the box by
1Exhibit 2395.
'Exhibit 2398.
•Exhibit 2394.
'Exhibit 2400.
425
Commodore Business Machines
Harry Wagman and turned over to Tramiel at the request of C. P. Mor-
gan on January 10. Commodore Business Machines did not pay the re-
quired $104,000 to Analogue for these shares until February 28,5 and
only then was able to restore 130,000 shares to the Aurora box. By June
30, when Baronet Associates assumed the debt of Analogue Controls to
Commodore Factors, it amounted to $774,639.14 in U.S. funds on which
Analogue continued to pay 12% to Baronet Associates, which thereafter
paid SVi% by way of interest to Commodore Factors.
This sale of 130,000 shares of its treasury stock was made by Ana-
logue Controls pursuant to a resolution of its directors, taken as early as
August 20, 1963 at a meeting held in the offices of Solomon & Singer in
Toronto, granting an option on all the unissued shares left in the treasury
to Commodore Business Machines at 80^ per share, "in consideration of
past and continuing financial support to the corporation by Commodore
Business Machines". At the same meeting C. P. Morgan was reported to
have advised the board to sell the business of making potentiometers,
and develop for the future that of making copying machines.6 It may
accordingly be concluded that Tramiel's expression of dissatisfaction
with the operations of Analogue, recorded in the Commodore Business
Machines' minutes of May 27, 1964, represented long-standing doubts
about the value of the company's investment. At the same meeting Tra-
miel, as president, was authorized to continue attempts to borrow $450,-
000 and to sell Analogue's potentiometer business. The first indication
that something indeed was being attempted appears in the minutes of a
directors' meeting of Commodore Business Machines, dated August 4, at
which the company gave an option to Ross & Co. (Bahamas) to buy its
Analogue shares at $1.35 per share, open until October 15. Ross & Co.
were a firm of stockbrokers in Nassau, presided over by one Leon Irving
Ross, who had Canadian connections, and who was subsequently expelled
from the islands by official action.7 This, according to King's recollection
of the meeting, was done at Morgan's suggestion, and he apparently added
that he had seen an advertisement in the Toronto Globe and Mail, indi-
cating interest on the part of somebody requiring a company with
shares listed on a stock exchange and with an operating plant, and
he had, according to King, answered this advertisement. Morgan was no
longer chairman of the board of Analogue Controls, having been re-
placed by Tramiel, who was an American citizen, on February 5, 1964,
apparently as a result of misgivings by security officials of the United
States Air Force to which the company was under contract for potenti-
ometers. Morgan ceased to be a director on March 1, not being re-elected
at the annual meeting of shareholders of that date. Nothing more was
'Exhibit 2402.
"Commission file: Securities and Exchange Commission — memorandum of Peter J.
Adolph, March 10, 1966.
"Exhibit 2477.
426
Chapter VIII
heard of the Ross option which, according to Ross himself, was secured
for Mutual Bank & Trust Company, a Bahamian "front" for Elias Y.
Rabbiah.
Commodore Business Machines Sale to Mortgage Trust & Savings
Corporation (Bahamas) Limited
The next thing heard by King was that Commodore Business
Machines' interest in Analogue Controls, amounting to 332,000 shares,
had been sold at a price of $1.45 per share. Morgan did not disclose the
name of the purchaser to King, but said they were good people who had
big ideas for Analogue. Tramiel claimed that he knew nothing about
this transaction either, except the price per share, and that he had been
in Germany when all the discussions had occurred and decisions been
made at the Commodore Business Machines board. He specifically de-
nied being at the meeting of August 4, the minutes of which record the
attendance of himself, Morgan, Kapp, Solomon, Wagman, King, Med-
land and Goodfellow. It is difficult to believe that any one as closely
associated with Morgan as Tramiel was fobbed off without any informa-
ation at all, but if he did get any, it was no doubt intended to mislead
him. Tramiel qualified his evidence at this point by saying that, when he
was next in Toronto, Morgan told him that the buyer of the Analogue
shares wanted all of them, not simply those held by Commodore Business
Machines, and reminded him that there were three or four thousand of
Tramiel's personal shares that should be turned over. On this occasion
Morgan said that the company was going into the pharmaceutical busi-
ness, at which Tramiel said he would keep his shares, and Morgan sug-
gested that he should stay on as a director. Medland was apparently as
much in the dark about the disposal by Commodore Business Machines
of its Analogue shares as he had been about their acquisition. True to
his custom, however, he had visited the Analogue plant while Commo-
dore Business Machines retained its interest, but had not been impressed
by its manufacturing facilities, as he had been in the case of Willy Feiler
and Commodore Industries in Shannon.
One director, without doubt, knew the whole story, which is now to
be told, and that was Rennie Goodfellow. His intructions were exempli-
fied in two confirmations from Barrett, Goodfellow & Co., dated Septem-
ber 14, 19641 dealing with the sale of 332,000 shares of Analogue Con-
trols by Commodore Business Machines for a total price of $481,400, or
$1.45 per share, with a commission of $4,150 and transfer tax of $830.
On the same day C. P. Morgan wrote to Barrett, Goodfellow & Co.. as
chairman of the board, authorizing them to withhold payment to Com-
modore Business Machines until the purchaser had remitted the neces-
sary funds.2 On October 5 Barrett, Goodfellow & Co. drew a cheque in
'Exhibits 2403-4.
Exhibit 2405.
427
Commodore Business Machines
favour of Commodore Business Machines for $243,950, apparently re-
lating to the sale of 170,000 shares, and Commodore Business Machines
on the same day drew one in favour of Aurora Leasing Corporation for
$264,799. 853 to retire its loan. Also on the same day, Aurora Leasing
drew a cheque for $250,000 to Barrett, Goodfellow & Co.4 marked
"Chgd to Mtge. Trust." This brings on to the stage a company called
Mortgage Trust & Savings Corporation (Bahamas) Limited, incorpor-
ated in the Bahama islands on January 10, 1964,5 all of the shares of
which Morgan acknowledged to be beneficially owned by him. This, then,
was the purchaser for which Morgan had, as chairman of the board of
the vendor, directed Barrett, Goodfellow & Co. to withhold payment,
and this company of Morgan's now stood in the place of Commodore
Business Machines as Aurora's debtor, to which it gave a demand note
with interest at 9% and 75,000 shares of Analogue Controls as security,
instead of the 202,000 previously lodged by Commodore Business
Machines, the covenant of which, and the assets standing behind it, were
lost to the lender. On October 19 Barrett, Goodfellow & Co. paid Com-
modore Business Machines by cheque $192,470, and on the following
day the balance of $40,000 in respect of the remaining 162,000 shares.
These funds, a part of $300,000 supplied to them by Commodore Fac-
tors by cheque, dated October 19, signed by Morgan and Woolfrey and
payable to the Bank of Nova Scotia,6 were identified by a credit voucher
of Barrett, Goodfellow & Co.7 addressed to Mortgage Trust & Savings
of the same date.
The investment of Commodore Business Machines in 332,000
shares of Analogue Controls was made at a cost of $347,998.13, and its
sale on September 14 to Mortgage Trust & Savings produced $476,421,
yielding a profit of $63,887.66, after taking into account the $64,535.21
paid as interest to Aurora Leasing over the two years of its ownership
in respect of the loan of $250,000 to enable the purchase to be made.
The Aurora loan, of course, applied only to the acquisition of 202,000
shares. As for the 130,000 shares for which Commodore Business
Machines paid 80^ per share, the $95,680 in U.S. funds which was paid
to Analogue Controls was immediately paid out again, according to the
books of the latter company, in two amounts; one of $40,486.03 to
Commodore Business Machines Inc. in reduction of a loan payable, and
the other of $55,193.97 to Commodore Drycopy Inc., which was treated
as being an amount receivable from that company. Consequently Com-
modore Business Machines acquired the 130,000 shares by, in part,
accepting them in payment of moneys which its subsidiary company had
lent to Analogue Controls, and, in part, by receiving money back from
Analogue as a loan to another subsidiary company.
"Exhibits 2406-7.
♦Exhibit 2408.
'Exhibit 2409.
•Exhibit 2412.
TExhibit2411.
428
Chapter VIII
Mortgage Trust & Savings Lays Off 75,000 Analogue Shares
to Manhattan Sound Corporation
Commodore Factors treated the payment of $300,000 to Barrett,
Goodfellow & Co. as a special note receivable from Manhattan Sound
Corporation, for which the latter provided a promissory note,1 signed by
Fred B. Adair, in the amount of $279,181 U.S. funds. The board of
directors of Manhattan Sound, according to its minutes,2 apparently met
on November 5 in full strength, consisting of Fred B. Adair, Gustav
Mortensen, Benjamin H. Oremland, Donald W. Reid and Fannie
Cooper, the last named being a member of Oremland's firm. Adair
announced that the company had bought 75,000 shares of Analogue
Controls at $4 per share for $279,181, borrowing this amount from
Commodore Factors with interest at 9% , and pledging shares with Com-
modore Factors as collateral, whereupon his actions were ratified. This
transaction, and the purchase of the 332,000 shares were both off the
exchange. Of the 200 issued and authorized shares of Manhattan Sound,
Mildred Morgan held 30 and Donald Reid 50, of which 25 were bene-
ficially owned by C. P. Morgan.3
Manhattan Sound Corporation's 75,000 shares of Analogue Con-
trols were pledged and delivered to Commodore Factors on December
9, 1964, and by January 18, 1965 the loan had reached the sum of
$332,245.95. Manhattan Sound on that day gave Motion Picture
Security Corporation, described by Adair as "a little finance company
that takes paper on my commercial investments", a note for this amount
to Commodore Factors which, by journal entry, treated Manhattan
Sound's loan as having been paid, opened a new account for Motion
Picture Security and lowered the interest rate from 9 % to 8 Vi % after
capitalizing the interest due, thus giving the latter company a one-half
per cent "spread", and dispensing with the comparatively substantial
covenant of Manhattan Sound. Mildred L. Morgan owned 40% of the
issued stock of Motion Picture Security.
The Cost to Mortgage Trust & Savings of its Purchase of
Analogue Shares
A summary of these complicated transactions, by which C. P. Mor-
gan, in the character of Mortgage Trust & Savings Corporation (Baha-
mas) Limited, acquired the interest of Commodore Business Machines
in Analogue Controls, can now be attempted. In September 1964 Com-
modore Business Machines owned 332,000 shares of Analogue Controls,
and sold them at a price of $1.45 a share to Mortgage Trust & Savings
through Barrett, Goodfellow & Co. Payment was effected by Mortgage
'Exhibit 2413.
'Exhibit 2414.
'Evidence Volume 21 and Exhibit 2466.
429
Commodore Business Machines
Trust & Savings borrowing $250,000 from Aurora Leasing Corporation,
as security for which 75,000 shares were subsequently lodged. Proceeds
of the loan were paid to Barrett, Goodfellow & Co., who paid them to
Commodore Business Machines, which in turn paid them back to Aurora
Leasing in satisfaction of a debt. Mortgage Trust & Savings then sold
75,000 of the shares, which it had just bought for $1.45 per share, to
Manhattan Sound Corporation at a price of $4 per share, Manhattan
Sound being able to pay the price by reason of a loan made to it by
Commodore Factors for $300,000 for that purpose against the pledge
of the 75,000 shares. Proceeds of this loan went direct from Commo-
dore Factors to Barrett, Goodfellow & Co., who credited the amount of
$300,000 to the account of Mortgage Trust & Savings and paid out to
Commodore Business Machines the balance of the purchase price for
332,000 shares of Analogue in the sum of $192,470. As far as Commo-
dore Business Machines was concerned, it sold its 332,000 Analogue
shares for $128,422.87 more than it had paid for them. In respect of
202,000 shares it always owed the original purchase price to Aurora
Leasing, and had been required to pay interest to that company. After
the deduction of the interest the net profit of Commodore Business
Machines on the sale was $63,887.66. The cost to Mortgage Trust &
Savings of its purchase from Commodore Business Machines of $485,-
550 for 332,000 shares was reduced by the sale of 75,000 shares to
Manhattan Sound for $300,000, which left Mortgage Trust & Savings
with 257,000 shares at a net cost of $185,550 or 72^ per share. All
the money had been supplied by Atlantic Acceptance, and the name of
the real purchaser was successfully hidden behind a corporate dummy
in the Bahama Islands.
Intervention of George H. Weinrott
Since control of Analogue Controls had passed out of the hands of
Commodore Business Machines, it was necessary to supply the Toronto
Stock Exchange with information as to what had transpired. This was
done in a letter dated October 21, 1964 from Cimcony Limited, signed
by George H. Weinrott as president, to W. M. Ketchen, and since it
opens the door to a new prospect in the history of the company, it may
be quoted in full.1
"Dear Mr. Ketchen:
At the request of Analogue Controls, Inc. we give you the following
information.
We are Investment Bankers and Managers of a number of investment
funds acquiring for our own account and for others special situations
which we feel merit development.
: Exhibit 2417.
430
Chapter VIII
The division of the ownership of the 332,000 shares of Analogue Con-
trols, Inc. acquired from Commodore Business Machines (Canada)
Limited in the floor transaction on your Exchange on September 14,
1964 is as follows:
1. Cimcony Limited 75,000 shares
2. Overseas Holding Corporation .... 75,000 shares
3. Regina Investments Inc 75,000 shares
4. Mortgage Trust & Savings
Corporation (Bahamas) Ltd. 32,000 shares
5. Manhattan Sound Corporation
Limited 75,000 shares
Analogue is required to clear with the authorities in Washington any
changes in its Board of Directors under the Secrecy Act as it furnishes
equipment to the United States Navy and to certain prime contractors
who are recipients of Department of Defense orders.
Subject to this clearance, it is planned to add to Analogue's Board at
least three of the following persons :
(a) Fred Adair — President of Manhattan Sound Corporation Limited
and President of Motion Picture Securities Limited to represent
Manhattan Sound Corporation Limited, 411 Fifth Avenue, New
York.
(b) Dr. Kenneth Ray Rozee, Ph.D. M.S.C.— 619 Mellwood Road,
Toronto. President of Devonshire Laboratories Limited, Toronto,
newly formed Canadian subsidiary of Analogue Controls, Inc.
through which the company is developing its acquired interest in
the production of a vaccine to control the Herpes Virus (cold
sores). He is also supervising the tests on a disposable needle and
syringe for use in animal anti-biotics. This confidential program of
development and production will also be carried out in the United
States.
(c) Dr. L. W. Macpherson, Ph.D. M.R.C.V.S., D.V.S.M., Rt. #1
Nashville Woodbridge, Ontario, who has great experience in the
field of anti-biotics, has been obtained as a consultant in this ever-
growing field. He will assist Dr. Rozee in the furtherance of the
Company's interests along the lines mentioned previously.
(d) Carrol M. Shanks — Chairman of the Board of Cimcony Limited,
former President of Prudential Insurance Company of America.
(e) George H. Weinrott, 27 East 62nd Street, New York City, Presi-
dent of Cimcony Limited and Treasurer of Housing by Cimcony,
Inc. of Columbus, Ohio.
All of the Company's plans will be passed on to Analogue's shareholders
as soon as the changes take place in the Board Members.
At the time of writing all of the shares of the Company as indicated
above are in the hands of the principals concerned.
Very truly yours,
CIMCONY LIMITED
George H. Weinrott, President"
431
Commodore Business Machines
This was the beginning of an exchange of letters with Weinrott and other
directors of Analogue Controls, which occupied some months and will
be referred to in its proper place. In the meantime the information con-
tained in it must be examined critically. "Overseas Holding Corpora-
tion" was in fact Overseas Holdings Incorporated, and was, with Regina
Investment Corporation, a Liberian company. Both of these were
incorporated through Samuel Ciglen, Q.C. of Toronto, and, as he him-
self has informed the Commission, Overseas Holdings Inc. on the in-
structions of C. P. Morgan, and Regina Investment Corporation on the
instructions of David Rush. This was asserted by David Rush in his exami-
nation under the Securities Act,2 and denied by Morgan in his evidence
before the Commission. He maintained that he had no interest in either
company, but that both were the creations of David Rush who, he said,
had an option on 150,000 shares of Analogue Controls at $1.50 per
share and had never exercised it. Rush maintained that Regina Invest-
ment Corporation was a family corporation of which he was the manager,
and had an agreement with Morgan, of a verbal nature only, to acquire
75,000 shares of Analogue Controls. He said also that he had acquired,
through Ciglen, ownership of Regina Investment Corporation for his
family from Leon Ross of Nassau. In any event a demand was made on
Morgan, in the spring of 1965, by Peerless Engineering Company, a cor-
porate creature of David Rush, for 75,000 shares of Analogue stock,
and there is no reason to doubt that the information supplied by Ciglen
is correct; both companies were incorporated in Monrovia on October
21, 1964.3 There is no evidence that either company bought any
of the shares of Analogue Controls, and in fact there is abundant evi-
dence that all of the 332,000 shares were bought by Mortgage Trust &
Savings, and retained by it subject to the following disposition.
A delivery slip of Barrett, Goodfellow & Co.4 shows that 310,600
shares were delivered to Harry Wagman on December 9, 1964 and
25,000 on December 4 to British Mortgage & Trust,5 the latter pursuant
to a direction dated November 12 and signed for Mortgage Trust &
Savings by Frank Cockburn, "controller", instructing the brokers to
deliver free to the trust company 35,000 shares of Five Wheels and
25,000 shares of Analogue Controls, which British Mortgage & Trust
thereafter held as part security for a loan of $200,000 to C. Powell
Morgan, advanced on November 10.6 The 3,600 additional shares of
Analogue were acquired by various purchases on the open market. The
shares delivered to Wagman were disposed of by lodging 75,000 with
Commodore Factors as security for the loan to Manhattan Sound which
has been referred to, 75,000 with Aurora Leasing as security for a loan
Exhibits 4188-9.
'Exhibits 2419 and 2421.
'Exhibit 2422.
BExhibit 2424.
"Exhibit 2425.
432
Chapter VIII
to Cimcony Limited, 75,000 with Aurora Leasing as security for its
loan of $250,000 to Mortgage Trust & Savings, and by delivering the
remainder to Morgan himself. The loan to Cimcony Limited was for
the large sum of $500,000 in U.S. funds, and was part of a transaction
evolving from the combined ingenuity of C. P. Morgan and George H.
Weinrott which is illustrated by three documents. The first is a memo-
randum of a promissory note to Aurora Leasing from Cimcony of
Canada Limited,7 giving particulars of the $500,000 borrowed and the
collateral lodged, but without specifying either the interest rate or the
term of the loan. The collateral consisted of (1) 75,000 shares of Ana-
logue Controls, (2) 2,000 shares of the preferred stock of Cimcony
Limited with a par value of $200,000, and (3) assignment of an option
to acquire 3,000 preference shares of Cimcony Limited, "without re-
course", from Mortgage Trust & Savings. The second document is a
letter dated October 15, 1964, addressed to Mortgage Trust & Savings in
Nassau from Cimcony Limited,8 also in Nassau, for which George H.
Weinrott signed, and constitutes an agreement to sell 3,000 of the $100
preference shares of Cimcony Limited, and 25% of the outstanding
common stock of the same company for $300,500, providing that "pay-
ment may be made in lieu of all cash" by delivery of 75,000 common
shares of Analogue Controls, plus $500 in cash, all moneys referred to
being in U.S. funds. Payment was to be made, in accordance with the
terms of this agreement, on or before October 20; the space for accept-
ance by Mortgage Trust & Savings appended to the letter was left blank.
A third document is addressed by Cimcony Limited of Nassau to Cim-
cony of Canada Limited at 62 Richmond Street West in Toronto and
dated October 16,9 agreeing to sell to the Canadian company 75,000
shares of the common stock of Analogue Controls, 2,000 of Cimcony
Limited preference shares and the assignment of Cimcony Limited's
option to re-purchase 3,000 of its own preference shares from Mortgage
Trust & Savings, all for the sum of $500,000 in cash, plus all the out-
standing common stock of Cimcony of Canada which accepts the offer
by the hand of George H. Weinrott.10 Finally all this had to be ex-
plained to Harry Wagman, who was handling the books of Aurora Leas-
ing Corporation, Cimcony of Canada Limited, and, incidentally, Valley
Farm and Enterprises which had provided the only money ever invested
in Cimcony of Canada. There is in evidence a draft of a letter to Wag-
man from Weinrott, much amended, which Weinrott identified as his
own communication in his examination by the United States Securities
and Exchange Commission,11 and it is reproduced below in its amended
form.12
'Exhibit 2427.
"Exhibit 2427.
9Exhibit 2427.
"Exhibit 2427.
"Exhibit 2479.
"Exhibit 2426.
433
Commodore Business Machines
"Dear Harry:
Thanks for Sid's call last night. As per my promise, I mailed off at
once, a list of the disbursements requested. I hope he will do likewise in
sending me the data I need on the same subject matter.
I have just received your letter dated February 5, 1965 regarding the
$100,000 7% Non-Cumulative, Preferred of Cimcony of Canada in the
name of Valley Farms. The facts as set forth in the documents that were
executed at the time, are as follows:
(a) On October 15, 1964, Cimcony Limited entered into a contract
with Mortgage Trust under the terms of which Mortgage Trust
transferred to Cimcony Limited, 75,000 shares of Analogue Control
Common, plus $500 in cash, in exchange for 3,000 shares of
Cimcony Limited Preferred and 25,000 of Cimcony Ltd. Common.
The Analogue shares were registered with the Toronto Stock Ex-
change in the name of Cimcony Limited by letter dated October
21,1964.
(b) On October 16, 1964, Cimcony Ltd. transferred to Cimcony of
Canada the 75,000 shares of Analogue plus 2,000 shares of Cim-
cony Ltd., Preferred in exchange for $500,000 in cash plus (10,000
shares) of Cimcony of Canada Common, (being all of the out-
standing stock). This transaction took place while Cimconv of
Canada was operating under the agreement with me (personally)
dated 5/1/63 a copy of which you sent me.
(c) In order to legally implement the matter, C.P.M. and I agreed that
the initial investment of Vallev Farms of $100,000, should now be
represented by the issuance of $100,000, 7% Non-Cumulative Pre-
ferred referred to above, and the 10,000 shares of Cimcony of
Canada Common, for transfer to Cimcony Ltd.
(d) Then Cimcony of Canada entered into a contract with Aurora Leas-
ing dated November 3, 1964, under which they agreed to lend
Cimcony of Canada $500,000, secured bv 2,000 shares Analogue.
That's how Cimconv of Canada obtained the money to pav Cim-
conv Ltd. the $500,000 cash; I was told. In addition, the 300.000
of Cimcony Ltd. Preferred was also assigned to Aurora as addi-
tional collateral for the loan.
(e) All of the above transactions were conditioned on the promise that
the remaining stockholders of Cimcony Ltd. would invest $251,500
in cash for Preferred and Common, which was done on November
3, 1964; Evidence of which has been made available to Mortgage
Trust.
So I recommend that vou check the above, and promptly mail the
sum of $300.00 to Croll for the Preferred.
As to the stamp tax; our board decided that, by reason of the dis-
proportion of stock ownership each stockholder should pay the tax
which is based on the number of shares and not their par or back
value.
434
Chapter VIII
In conclusion :
The transaction on the $500,000 Analogue, Ciracony Ltd. and Cim-
cony of Canada Securities, indicates that prior to the time this transaction
took place Cimcony of Canada was not a wholly owned subsidiary, but
the property of Valley Farms and George Weinrott.
At the time of 'closing' however it was a wholly owned subsidiary, who
had borrowed money from a non-associated third party (Aurora) so
that it could invest $500,000 in its parent Cimcony Ltd.
This is a unique technical as well as legal question of
(1) Whether the common stock of Cimcony of Canada should not
be issued in the names of the various stockholders.
(2) This whole business was done to accommodate C. Powell Morgan
so he could raise the $500,000 from Aurora and he was to give
Cimcony Ltd. the benefit of any possible rise in the Analogue
Stock alone a figure which he has repeatedly promised to pro-
vide. The discussions are based on the hope that if Analogue
could produce profit sufficiently large enough to pay off the
$500,000 to Aurora then Cimcony Ltd. 5,000 shares of Pre-
ferred (500,000) would be refunded to Cimcony of Canada the
borrower, who in turn would transfer same to Cimcony Ltd. for
retirement.
Sincerely,
George H. Weinrott"
The reference to "Sid" is to S. S. Chusid, an accountant in Wagman's
office, and "Croll" is Senator David Croll of Toronto, who was Wein-
rott's solicitor. The shareholders of Cimcony Limited were revealed
by Weinrott in examination for discovery in the bankruptcy of Cimcony
of Canada, held in New York on January 10, 1966.13 Carroll M. Shanks
held $100,000 preferred stock and 25,000 common shares, Thomas F.
Reilly $100,000 preferred and 10,000 common, George H. Weinrott
$50,000 preferred and 40,000 common, Mortgage Trust & Savings
$500,000 preferred and 25,000 common shares. No doubt a great deal
depended upon the profit that could be generated by a sudden rise in the
price of Analogue shares.
Aurora's security was therefore 75,000 shares of Analogue Con-
trols and 2,000 preference shares of Cimcony Limited, registered in the
name of Cimcony of Canada and endorsed in blank, 3,000 of the same
preference shares registered in the name of Mortgage Trust & Savings
which were not endorsed, and the 25,000 common shares of Cimcony
Limited registered in the name of Mortgage Trust & Savings, also not
endorsed. Against this, $500,000 in U.S. funds was dispatched by
Aurora to Nassau and was used as a down payment to Hugo Oppen-
heim und Sohn of Berlin in the acquisition of 120,000 shares of Atlantic
"Exhibit 3411.
435
Commodore Business Machines
Acceptance, a transaction which must be dealt with in detail later. 14 In
short and to recapitulate, Mortgage Trust & Savings notionally delivered
75,000 shares of its Analogue stock to Cimcony Limited, receiving in
payment $300,000 of that company's preference shares, which was the
equivalent of a price of $4 in U.S. funds per share for the Analogue
stock for which it had just paid $1.45. Cimcony Limited then sold the
75,000 shares of Analogue and $200,000 of its own preferred stock to
Cimcony of Canada, in return for $500,000 and the transfer of all the
common shares of Cimcony of Canada, whether this was lawful or not.
Cimcony of Canada was able to pay $500,000 to Cimcony Limited by
borrowing that amount from Aurora against the security mentioned
above, all these amounts being in American funds. In the upshot,
$500,000 went to Germany with other funds advanced by the share-
holders of Cimcony Limited, as will be described.
Inflation of Sales of Analogue Controls at October 31, 1964
The change of direction imparted to Analogue Controls after the
withdrawal of Commodore Business Machines from a position which
had secured to it 58% of the former company's common stock, and the
transactions of its new board of directors, must be postponed for a brief
account of the final stages of the disengagement of Commodore Busi-
ness Machines from a company which had not only not profited from
the association, but which owed directly to Morgan and Tramiel the
disaster which finally overtook it in the spring of 1965. The fiscal year-
end of Analogue Controls was October 3 1 , and from perusal of the com-
parative condensed balance sheets shown on Table 44 * it will be seen
that those sales for the year ending October 31, 1962 amounted to
$1,278,000, for the year ending October 31, 1963, $1,561,000 and for
the year ending October 31, 1964, which corresponded with the with-
drawal of Commodore Business Machines, $1,897,000, the last being
an increase of more than 20%. An unusual distinction is made in the
company's sales ledgers,2 in that sales are broken down into two ledger
accounts, one called "sales" and the other "sales — commercial prod-
ucts". No doubt this reflects the distinction between the potentiometer
and switch side of the business on the one hand and the business ma-
chines side on the other. For 1964 the total "sales" amounted to
$886,799.10. "Sales — commercial products" for the same period are
shown as $1,018,449.39. The total of these two figures, after providing
a small amount for sales discounts, was shown as $1,896,937.88. "Sales
— commercial products" at the end of normal posting on October 3 1 ,
1964 were $229,545.56, but since merchandise returned for the period
amounted to $41,257.83, resulting mostly from difficulties arising out
"Chapter X.
Exhibit 2384.
■Exhibit 2428.
436
Chapter VIII
of the constant voltages required for the adapted German machines, the
net sales were recorded as being $188,287.73, there being a slight error
in calculation in the order of about $1. Then two additional entries
were made on October 31 of $530,161.66 and $300,000 which in-
creased the aggregate of all sales by some 45%. The first of these
apparently arose from an agreement dated October 31 between Ana-
logue Controls and Commodore Drycopy Inc.,3 signed for Commodore
Drycopy by Jack Tramiel as president, and for Analogue Controls by
Fred B. Adair as secretary. It recites the fact that Analogue had been
manufacturing a dry copy machine for Commodore Drycopy, and the
existence of an agreement of September 1963, providing that the latter
could terminate this manufacturing and the fact that it had elected to do
so; the parties agreed that Analogue's costs had been $698,042.34, $614,-
042.34 of which Commodore Drycopy covenanted to pay by assuming
a debt of Analogue for that amount due to Baronet Associates for ad-
vances in connection with the development and manufacture of the
machine, and to pay the balance of $84,000 at the rate of $3,500 per
month for 24 months, the date of commencement being unaccountably
left blank. The Analogue balance sheet showed research and develop-
ment costs in the unlikely amount of $166,666.66, and note No. 3, pro-
vided by the auditors to the financial statement for the year ended
October 31, 1963, refers to this as being for the dry copy machine. For
1964 the research and development item is $128,333.32, which remains
as an asset in spite of the sale of the dry copy business by Analogue on
the last day of its fiscal year, instead of being eliminated as one would
expect. This had the effect of turning into an apparent profit what prop-
erly should have been shown as a loss at the year-end of $124, 985. 33. 4
Of the total purchase price of $698,042.34 under the agreement, $530,-
161.66 only is, by a journal entry, attributed to sales and the sum of
$158,642.03 is recorded as a reduction of a loan made by Analogue to
Commodore Drycopy. The effect of all this is that Analogue sold the
dry copy business for roughly $540,000.
Another addendum to sales made on October 31 of $300,000
reflected a purported sale of machine parts to Jay-Man Distributors Inc.
The parts were in a warehouse and manufacturing building shared by
Commodore Drycopy and Analogue, and never physically moved, be-
cause on February 1, 1965 Jay-Man delivered an invoice of the same
goods to Analogue for the amount of $300,000, and Analogue recorded
a purchase of them at that price on the same day.5 No adjustment was
made to the sales of the previous year and, on June 30, 1965, Analogue
reinstated its original invoice and showed that Jay-Man owed $300,000
to it once more. No actual payments were made; there was merely an
*Exhibit 2429.
'Exhibit 2381.
'Exhibit 2430.
437
Commodore Business Machines
exchange of invoices, the address of Jay-Man Distributors being shown
as 200 Frank Road, Hicksville, N.Y., the same as that of Analogue
Controls and Commodore Drycopy. The effect, of course, was to increase
the sales of Analogue for the year 1964, and to increase the profit to the
same extent, since there was no corresponding reduction in the assets for
research and development costs.
The next step was taken on December 1, 1964 by Commodore
Drycopy selling copying machines and parts, involved in its transaction
with Analogue Controls, to Jay-Man Distributors according to an in-
voice of that date in the amount of $524, 265. 3 1,6 and Jay-Man paid
this amount by assuming the debt of Commodore Drycopy to Baronet
Associates.7 Baronet substituted Jay-Man as a debtor for Commodore
Drycopy by a journal entry in its books dated December 1 . Jay-Man, a
Tramiel and Kapp company, had no assets with which to pay this debt
and was now responsible to Baronet for a very large sum of money
which had been advanced by Commodore Factors and originally by
Atlantic Acceptance. Not only did Jay-Man have no assets, but accord-
ing to its income tax return of April 1965 its deficit was over $800,000.
Jack Tramiel, as may be imagined, was closely questioned about
transactions thus crudely contrived to give a false appearance to the
published financial statement of Analogue Controls, a public company
having its shares listed on the Toronto Stock Exchange. He was a con-
tinuing director of Analogue, and indeed was chairman of the board
until he was replaced in this position on March 15, 1965 by Major-
General Christopher Vokes, a distinguished Canadian ex-officer who
was apparently acceptable to the American security authorities in this
capacity. The circumstances and documents were put to Tramiel by
counsel, and he said that Morgan at every point advised him to do what
was done. He said that Baronet Associates and Jay-Man Distributors
were companies belonging to Morgan in which he and Kapp had only a
nominal interest. Jay-Man sold parts back to Analogue for $300,000 in
February 1965 because F. B. Adair had demanded payment, and this
was Morgan's solution to the problem. He, Tramiel, was not an account-
ant and could not explain why research and development costs had been
retained as an asset, when the dry copy business had been sold to one
company, and the parts in connection with it sold to another totally
unrelated company. The concluding exchange between counsel and
witness was as follows:8
"Q. It was quite clear, was it not, that the effect of the transaction was
to transfer assets alleged to be worth over $800,000, out of Analogue,
in return for cash in the form of forgiveness of debt of Analogue; that is
correct, is it not? Analogue sold the business and had sold the parts, and
•Exhibit 2431.
'Exhibit 2432.
•Evidence Volume 86, pp. 1 1638-47.
438
Chapter VIII
it had its indebtedness to Baronet cancelled to the amount of the sale, is
that so?
A. That is right, yes.
Q. That was the first effect. The second effect was to increase the sales
of Analogue on the last day of its year, is that correct?
A. When you say increase, no, I wouldn't know it increased; it was just
sold.
Q. But if they had not sold them, their sales would have been less?
A. Yes.
Q. By some $800,000?
A. Yes.
Q. The third effect then was to enable Analogue to report sales in the
order of $1,800,000, and to report a small profit for the year ending 31
October, 1964, which it could not have reported had these transactions
not taken place on the last day of the year, is that correct?
A. The only — no, that is not correct. The only thing they would not
have is the sales, nothing to do with the profit.
Q. Yes, Mr. Tramiel, I suggest to you that since Analogue showed as an
asset research and development costs in the order of $ 120,000-odd and
continued to show them as an asset after having sold the business in
respect of which the research and development costs had allegedly been
incurred, the effect was to increase Analogue's profit from the sale.
A. I don't follow exactly what you are saying, Mr. Shepherd, because —
Q. Is it not analogous to a situation such as this? If Analogue had had
a thousand dollar bond and had shown a thousand dollar bond as an
asset, then had sold the thousand dollar bond on the last day of the year
and had simply recorded sales of one thousand dollars but had left the
thousand dollar bond as an asset, the effect of that would be to enhance
Analogue's profit?
A. Yes, but I believe that in this document here that we have paid some
$160,000 for research and development.
Q. In the previous year, Mr. Tramiel, you carried, I put to you,
$166,666.66 as research and development relating to that Drycopy
business?
A. Right.
Q. At the end of October, 1964, the company still carried a sum in
excess of $120,000?
A. Maybe it was more than $ 1 60,000.
Q. But it was not the previous year.
A. Maybe it was during the year.
Q. I beg your pardon?
A. It could have been during that particular year.
439
Commodore Business Machines
Q. Do you say that you think perhaps that during 1964 —
A. Yes.
Q. — Analogue Controls expended the difference between $ 120,000-odd
and $698,000 in developing its dry-copy machine?
A. It could have been.
Q. Indeed it could. Now, a transaction like that, as an officer of the
company you would remember. Did Analogue Controls spend a sum in
the order of half a million dollars during the year ending 31st October,
1964 in developing the dry-copy business?
A. You say half a million dollars?
Q. Yes.
A. But the $164,000 was for the past two or three years.
Q. Yes?
A. It was not for one year. If you ask the question if they would have
spent $ 1 20,000 during the one year —
Q. Yes?
A. I say it is very feasible.
Q. Did they?
A. This I couldn't answer you. I am not an engineer, but when I was
getting the figure that was spent it was verified by the accountant, and I
was satisfied.
Q. Didn't you tell me yesterday, Mr. Tramiel, that Analogue Controls
had in fact gone out of the business of trying to manufacture these
machines, and you were trying to sell Analogue Controls?
A. I mentioned this on Thursday, yes.
Q. Is that not correct?
A. Yes, but it still doesn't mean —
Q. Do you think it is likely that they spent $ 120,000-odd during that
year on research and development?
A. What I was trying to sell does not mean that the engineers knew if
we want to sell it, because we had to continue being in business and try
to get the money back in the investment way.
Q. Mr. Tramiel, if they had not spent the whole $120,000 on 31st
October, 1964 even, do you think it proper to continue to show that as
an asset, research and development, after the company has sold the busi-
ness?
A. I am not an accountant, Mr. Shepherd, but I know that the engineers
working on research and development, they develop certain things, and
just by developing a copying machine they could have knowledge to
develop something else from the same thing. How they came, on what
basis they did it, I couldn't answer you.
440
Chapter VIII
Q. Then in February —
A. But, Mr. Shepherd, one more answer to your question: By October
31st how the statement was set up and whatever it is, I felt personally
that Commodore already had sold this business. Hew it is going to be
done was more up to the new owners than to me.
Q. But you didn't know who the new owners were?
A. I did know. Mr. Adair was the president; he was a big shareholder.
Q. But you didn't know who the new owners were?
A. Mr. Adair was the president; he was a big shareholder.
Q. Mr. Tramiel, you have told me, and I have asked you a number of
questions about it to make sure that I understood you properly, you have
told me not fewer than six times that you did not know who bought
control of Analogue Controls, is that correct?
A. That is correct, but here even you showed me this. Mr. Adair signed
this. That means he was president.
Q. He was indeed.
A. He must have been appointed by the new owner.
Q. Yes?
A. So as far as I am concerned he was the representative of the new
owners. If they hadn't the shares or not I found out afterwards, but he
was the representative of the new owners.
O. Yes.
A. For that reason —
Q. What was the point you wanted to make?
A. My point was, October 31st he was really the president, where when
it came to the statement he was involved in the statement to know what
is right or wrong.
Q. Indeed he was, and you were chairman of the board and involved in
the approval of that statement, were you not?
A. Chairman of the board to a certain extent as sitting there because I
was there previously, but my interest was completely sold.
Q. Mr. Tramiel, I put it to you that these sales were created on the last
day of Analogue's year for the purpose of causing Analogue to show a
break-even position in its published financial statement, and for no other
reason; and that respecting the $300,000 sale of parts, the parts never
moved, they were invoiced back again to the vendor within four months;
and that it was never intended that Jay-Man pay $300,000 for these
parts.
A. Are you telling me —
Q. I am putting this to you.
A. — that these are the facts?
Q. I am putting this to you.
441
Commodore Business Machines
A. But you are telling me this is the facts?
THE COMMISSIONER: It is a suggestion counsel is making to you
and inviting your comment on. What is your comment on that sugges-
tion?
A. My comment is that I cannot answer the question the way counsel,
the way Mr. Shepherd has said, that this was done for this and this
reason. It was only done for reasons where the facts were there, that
people were present, accountants were present. Mr. Morgan had said
to me previously that he would like to see Analogue come out even in
this transaction.
MR. SHEPHERD: Of course, Mr. Tramiel, we need not quarrel about
it. That was precisely the point I wanted to make. Would you please
tell me when that conversation took place?
A. Some time in September, 1964.
Q. And he said that, did you say, Analogue was to come out even at
the end of the year, is that correct?
A. This is what Mr. Morgan asked.
Q. Yes?
A. Mr. Shepherd, pardon me, if that is what he said, was it still not up
to me to make it even or not even? Yes, if it comes to buy the dry-copy
and if the research is $150,000 and he says 'No, I will sell it to you for
$175,000', this meant, yes, Mr. Morgan, that he could adjust the price,
but when it comes to the accounting I cannot control it.
THE COMMISSIONER: Do I understand then that you felt that you
had no obligation in this respect as chairman of the board of Analogue
Controls?
A. To do what, Mr. Commissioner?
Q. No obligation as far as the statement was concerned?
A. My obligation was to see the facts from the auditor and from man-
agement of the company, to present me with the facts.
Q. You have indicated that Mr. Morgan suggested to you that all these
arrangements should be made in order to give what I can only infer was
a false impression to the public about the balance sheet of Analogue
Controls. Do you say that you accepted Mr. Morgan's direction on this
point?
A. No, Mr. Commissioner. Mr. Morgan told me he would like to see
it come out even, the way I took it.
Q. Then you saw to it that it did?
A. No, sir.
Q. Well, who did if the chairman of the board didn't have anything to
do with it, who did?
A. I didn't say I had nothing to do with it. I have said that when the
facts came in and it looked to me that the proper facts from the auditor
and from management —
442
Chapter VIII
Q. You call all this juggling on the books, facts?
A. I do not call it juggling at all, because I didn't juggle it and I don't
know how to juggle it. I am not an accountant."
The evidence of C. P. Morgan naturally had a different emphasis,
and it shows, in spite of the difficult circumstances under which it was
taken, and in the absence of all the documents which were put to Tramiel
some eight months later, a remarkable grasp of the details of the trans-
action.9
"Q. In order to abbreviate these hearings again, I will put to you a
lengthy question.
I put it to you that on the annual statement of Analogue dated the
31st of October, 1964, the gross sales were shown at a figure in the
order of $1,800,000 and that gross sales would have been approximately
$900,000 for that year ending the 31st of October, 1964, were it not
for the fact Analogue entered into two transactions which for want of
better term I will call special transactions and they were these. First,
Analogue, as I am informed, was in possession of a large number of
dry copy machines which they had been unable to sell because there had
been some technical difficulty encountered with these machines which
were of European origin. Is that correct?
A. To the latter part of your question or the whole thing?
Q. Anything that is wrong about it, would you correct me?
A. To the best of my knowledge, what you say generally is true.
Q. Then that business was called the dry copy business and Analogue
also had some part which related to typewriters there also?
A. I think maybe it is probably dry copy parts.
Q. And Analogue sold the dry copy business for a sum ranging up to-
wards $700,000 and it also sold to Jay-Man the parts for approximately
$300,000 and the effect of these sales after all adjustments had been
made was to increase Analogue's sales by $900,000 and shortly after
the year-end Jay-Man is purported to have purchased these parts for
$300,000, sent an invoice to Analogue purporting to convey back to
Analogue the same parts for $300,000. Can you help me as to what
this was all about and the part everybody played in it?
A. I will start with the acquisition by Mortgage Trust and Savings of
the controlling interest in Analogue which is about September 1964 with
the annual report, the fiscal year-end, coming up in October, six weeks
away.
I was present at a meeting in New York at which Mr. Adair and Mr.
Weinrott took over directorship in Analogue Controls Inc. And it was
a lengthy meeting because there was, in addition, a severance account to
be paid by Commodore Business Machines which represented as you
know, two share quarters, half by Commodore and half by Analogue.
They worked out a formula to pay the development expense that was
shown on Analogue's books.
"Evidence Volume 26, pp. 3450-9.
443
Commodore Business Machines
Q. This was in relation to the dry copy business?
A. Yes, I presume it was. Secondly, they worked out a deal for Mr.
Tramiel to take out his dry copy inventory and to take out his dry copy
parts inventory as of October 31st. Mr. Tramiel was a continuing
director in Analogue. It was agreed, in view of the fact it was such a
short period of time to the end of the year, that they would wait until the
physical inventory was taken October 31st, so these machine transfers or
facts would be taken out of Analogue inventory and transferred back to
Commodore Dry Copy Incorporated which was a subsidiary company
of Commodore Business Machines in New York and this was, in fact, a
matter of record.
It is in the Analogue minutes of what took place with regard to the
making of the statement October 31st and where the inventory went and
where the parts went and the prices at which they were brought is solely
the responsibility of Jack Tramiel.
No other director of Analogue — I am talking about the two new ones,
Weinrott or Adair — had any knowledge of the value of the inventory.
Mr. Tramiel made the statement that the company looked like it broke
even for the fiscal year. That had to be represented by the physical
inventory which was to taken October 31st. I am trying to bring this
point clearly to you, Mr. Shepherd. If there were any figures that would
misrepresent the October 31st, 1964 statement, they were wholly part
and parcel of Mr. Tramiel and Mr. Zupa, nothing to do with the con-
tinuing directors.
The deal was they would get their parts out and the year-end would
represent approximately a break-even figure.
Q. Did Mr. Tramiel have any beneficial interest in Analogue?
A. He sold 332,400 shares as President of Commodore Business
Machines and he guaranteed at that time that his company had approxi-
mately broken even.
Q. Did this guarantee that the company approximately broke even
ever get committed to writing?
A. I don't believe it did, but it was part and parcel of the deal. Com-
modore made a profit on the sale of Analogue shares of about $80,000.
Q. Did you have any opinion as to what the value of the dry copy
business in fact was?
A. No, I didn't.
Q. Did you have any opinion as to what value of the parts inventory
was?
A, I had no knowledge.
Q. Do you now have any opinion?
A. I can only give you this information that came to me from Mr. Adair
who was continuing President of Analogue. When he got this invoice
back from Jay-Man, he hit the roof about it because it looked like the
statement was false. He was concerned about the fact that Analogue
had produced a false statement for its shareholders as he was its con-
tinuing President.
444
Chapter VIII
He couldn't tell you anymore than I as to the value of the machines
or parts because he is as unfamiliar as I am with that particular business.
Mr. Tramiel had personal knowledge.
Q. Were the facts that Analogue sold the parts inventory to Jay-Man for
$300,000 and that Analogue then asked Jay-Man or one of its officers —
I don't know whom — to pay the $300,000 and Jay-Man said they
couldn't pay the $300,000 because they didn't have any moneys and they
then sent invoices to Analogue saying that Jay-Man had sold the parts
back to Analogue for $300,000 — are those the facts?
A. As far as I know. I know the invoice was received by Mr. Adair.
The rest of the statement I can't answer.
Q. How was it envisaged that Jay-Man would be able to pay $300,000
for the parts?
A. I believe the idea was that the parts were worth $300,000 and that
they were to be sold in due course to Commodore Business Machines in
the United States and I believe although I am not certain, that Baronet
was advancing money to Analogue at that time and when the inven-
tories were transferred to Commodore Dry Copy and Jay-Man, it only
represented a switch of advances in Baronet to these two companies as
against advances that were being made at that time to Analogue Controls.
Q. Now, the dry copy business, it was purchased by one of the sub-
sidiaries of Commodore Business Machines. Am I correct in that?
A. The dry copy business?
Q. Yes.
A. Did it not go back to Commodore Dry Copy?
Q. That is correct. It was sold to Commodore Dry Copy?
A. Right.
Q. Then after the end of the fiscal year of Analogue, did Commodore
Dry Copy not then sell that business back to Jay-Man in return for
assuming the indebtedness of Commodore Dry Copy to Baronet?
A. What Mr. Tramiel did in the switch around, I can't tell you.
Q. The only benefit I suggest which was going to arise out of producing
the financial statement of Analogue, which would appear more attractive
than it would have done had the $900,000 additional sale not been
added, would accrue to owners of shares of Analogue and you were the
owner of shares of Analogue?
A. Analogue would never have been purchased at $1.50 except on the
understanding that these two sets of inventories were there to be taken
out to leave Analogue as an operating potentiometer company because
there was in the background a pending and brewing deal with a chap
by the name of Quinn to go into Analogue to take over the potentiometer
business.
He was the senior engineer at Fairchild who had a big potentiometer
business and the assurance that was given to him by Mr. Tramiel was
that the company had just about broken even. The book value of the
445
Commodore Business Machines
inventory on the books of Analogue when they were sold back to the
dry copy company or Jay-Man would show an approximate break-even
figure for the year.
There was never any attempt on my part to try and get a pass on
losses that were evidently in the books of Analogue because I had no
knowledge that there were losses in Analogue represented by these dead
inventories.
Q. Do I understand then, if I can sum it up, that you assert this to be
the case.
Commodore Business Machines owned 332,400 shares of Analogue
Controls and at some date prior to September, 1964, do you say that
Mr. Tramiel and yourself and other directors of Commodore Business
Machines discussed the sale of Analogue Controls shares owned by
Commodore Business Machines to you or to a purchaser to be pro-
duced by you at $1.45 per share and do you say that Mr. Tramiel and
Mr. Kapp informed you, prior to you undertaking to purchase these
shares at $ 1 .45 that the dry copy business then owned by Analogue and
the inventory of parts would be sold by Analogue at prices to be deter-
mined as follows; with respect to the dry copy business, an amount fairly
calculated as being equal to the investment which Analogue had in this
dry copy business and with respect to the parts inventory, at an amount
representing a fair market value of the parts and that Mr. Tramiel and
Mr. Kapp told you that after these two sales had been consummated,
Analogue as at 31 October, 1964, would be approximately in a break-
even position on the year's operations, that it would have rid itself of
the dry copy business and parts and would then be only a potentiometer
business plus its connection with Devonshire Laboratories and you pur-
chased the shares on the faith of those representations and that you
didn't know, nor do you now know, the details of how these sales of
the dry copy business and the parts inventory was carried out, nor have
you any informed opinion as to the propriety of methods adopted or the
reasonableness of the sums which are purported to be paid for those
parts and dry copy business?
A. Yes, that statement in its entirety is true plus Mr. Tramiel on behalf
of Commodore Business Machines agreed to pay an amount to take out
of Analogue the development expenses which were then present on the
books of Analogue at the time of transfer of the 332,000 shares."
New Directors of Analogue Controls: The Pharmaceutical Experiment
Two matters of importance remain to be considered in the history
of Analogue Controls; the first was the new enterprise about which
Morgan had spoken to Tramiel, and the second the use made by Morgan
of the block of shares which gave him, through Mortgage Trust &
Savings his Bahamian company, control of Analogue in a transaction
which has already been examined in part in connection with the rais-
ing of $500,000 in U.S. funds from Aurora Leasing Corporation. By
referring back to Weinrott's letter to W. M. Ketchen of the Toronto
446
Chapter VIII
Stock Exchange of October 21, 1964 it will be seen the exchange
was told that it was planned to add to the board of Analogue at least
three of Fred B. Adair, president of Manhattan Sound Corporation, Dr.
Kenneth R. Rozee of Toronto, president of Devonshire Laboratories
Limited, Dr. L. W. MacPherson of Woodbridge, Ontario, Carrol
M. Shanks, chairman of the board of Cimcony Limited and George H.
Weinrott, president of Cimcony Limited. At a meeting of the board of
directors of Analogue held on October 23, 1964 Carman G. King,
Manfred Kapp and Henry W. Goldsmith resigned and were
replaced by Dr. Rozee, Dr. MacPherson and Weinrott. The name
of George H. Weinrott has occurred a number of times in these pages
and will occur again. He was a man at this time approaching 70 years
of age, of considerable energy, and with large ideas about his role in the
mortgage brokerage business with which he had been familiar during
most of his life. His first association with C. P. Morgan arose out of an
original contact with Eugene Last of Dalite Corporation (Canada)
Limited, who planned to build prefabricated houses in the republic of
Panama and who consulted Weinrott in New York in 1962. Thereafter
the company known as Cimcony of Canada Limited was formed, per-
haps the first of all the Cimconys, Cimcony being a contraction, accord-
ing to Weinrott, of Central International Monetary Corporation of New
York. Weinrott's grand design was to have a number of Cimcony com-
panies all over the world, taking mortgages of real estate and selling
them, as Weinrott suggested, in New York. Cimcony of Canada, which
played a part in the operations of Dalite at Thompson, Manitoba, where
the latter company was committed to supply prefabricated low-cost
housing, was incorporated on April 19, 1963, and its only infusion of
capital came from Valley Farm and Enterprises to the extent of
$100,000, under circumstances which were referred to in Weinrott's letter
to Wagman quoted on page 434. V/agman, no doubt on Morgan's direc-
tion, declined to concede an interest in the company to Weinrott in
accordance with the latter's understanding of what he was entitled to as
expressed in that letter, and Cimcony of Canada remained firmly within
the Trio orbit; but Weinrott continued, in spite of his appetite for
Atlantic money, to preserve Morgan's confidence and to occupy a place
in his plans for large-scale financing in the future. In the meantime he
had created Cimcony Limited and Cimcony of Great Britain Limited in
the Bahamas, and has acquired, or had incorporated a company in the
Isle of Man. Housing by Cimcony Inc. was located in Columbus, Ohio
to manufacture panels for prefabricated houses and, together with
F.F.C. Construction Inc., a wholly-owned subsidiary of Cimcony of
Canada, spent a good deal of Atlantic money producing one prototype
in a run-down redevelopment area of Buffalo, New York which proved
to be a fiasco. Weinrott appears to have had a good nose for easy
money, and to have shrewdly assessed its availability from Atlantic on
447
Commodore Business Machines
the easy terms of capitalized interest and indefinite repayment coun-
tenanced by Morgan, before whose eyes he dangled the glittering pros-
pect of borrowing for Atlantic the huge sums about which he was
accustomed to talk, but never to handle. All in all, Weinrott was one of
the more plausible of Morgan's close associates in the caste of charac-
ters which surrounded him, and battened on the strange mixture of gulli-
bility and greed in his makeup.1
Lachlan William MacPherson, who was examined by the Ontario
Securities Commission on March 14, 1966,2 was a veterinary surgeon,
a doctor of philosophy of Edinburgh University and a specialist in
microbiology in the School of Hygiene of the University of Toronto. In
addition to his teaching and administrative duties at the university, he
practised as a veterinarian and had, from time to time, attended to
horses owned by one Myer, alias Michael, Rush, a self-described stock
promoter, but in fact a professional criminal with wide and, indeed, peri-
lous connections in the field of organized crime. Dr. MacPherson art-
lessly observed: "He was well dressed, drove a Lincoln Continental and
as far as I could see belonged in the same category as my other clients".
Myer Rush took him out to dinner and introduced him to his brother,
David Rush, in the latter's "luxuriously furnished" apartment on Avenue
Road. There he was told that David Rush was promoting a company
in the pharmaceutical field, and was asked to consider becoming a con-
sultant or a director of such a company. The acquaintance ripened until
Dr. MacPherson was offering David Rush some suggestions as to what
field of pharmaceuticals might be developed to commercial advantage.
One of these, in which he himself was interested, was the preparation of
a vaccine for immunization against the herpes virus which causes cold
sores. At this point he was asked by David Rush if he would meet and
talk with the president of Atlantic Acceptance Corporation. The meet-
ing took place at the Faculty Club of the University of Toronto, at which,
apparently, Dr. MacPherson was the host, and where he explained the
advantages of producing "veterinary biologicals" cheaper and more
easily than "human biologicals", and enlarged on the herpes vaccine.
Morgan then brought up the subject of a combination injection and
holding device for making injections of drugs into animals, described as
"Tnjectovial", which he had been trying to obtain from England, and
the upshot of the discussion was that Dr. MacPherson agreed to act as
a consultant for a company to be formed at a fee of $5,000 per year.
At this luncheon meeting Analogue Controls was mentioned as the
company which would establish either a pharmaceutical division or a
subsidiary company for the purpose of implementing Dr. MacPherson's
ideas, and he may even have appeared to suggest this himself, since
Exhibit 2479.
'Exhibit 3777.
448
Chapter VIII
Myer Rush had persuaded him to buy some stock of that company. The
subsidiary company was Devonshire Laboratories Limited, incorporated
on September 29, 1964 as a private company in Ontario, on the appli-
cation of Samuel Ciglen acting as the company's solicitor. A laboratory
was set up at 147 University Avenue in premises adjacent to David
Rush's office, and Dr. Kenneth Rozee, an assistant of Macpherson'sfwho
was more directly in touch with research on the herpes vaccine, agreed
to become president of the company, and to devote his services part-time
to further research. Dr. Rozee had achieved some success with guinea-
pigs, but had not brought his vaccine to the stage where it was proven to
be harmless to human beings. After some progress had been made by
Dr. MacPherson in developing the "Injectovial" so that it might be
manufactured cheaply out of plastic, Neville Levinson, a large borrower
from Atlantic, was called in from Buffalo to manufacture prototypes
and samples, and MacPherson was induced by David Rush to give an
interview to a publicity man by the name of Henry Janes, who in due
course promoted the appearance of an article on the whole project in
the Toronto Daily Star. The injectovial had originated with E. Y.
Rabbiah of Racan Photo-Copy Corporation, who had acquired the idea
in England, but to what extent he did more than suggest the basic prin-
ciple to Morgan is not clear. In any event Dr. MacPherson, with wide
experience of the use of ampoules during the last war, produced what
he was convinced was a workable design, was also responsible for the
name Injectovial, and took at least the preliminary steps to get the device
patented. Of the $20,000 invested by Analogue Controls in Devonshire
Laboratories, $5,000 was given to Dr. MacPherson in accordance with
his contract, and $5,000 was paid to Manhattan Sound Corporation in
New York, and paid by it to David Rush for his public relations work
which, in Morgan's opinion, had a positively harmful effect. After what
Dr. MacPherson described as $100,000 worth of research had been
contributed to Devonshire Laboratories, particularly by Dr. Rozee, suffi-
cient progress had been made with the injectovial to arouse acute
interest on the part of British Drug Houses Limited and companies in
Belgium. All, as will be seen, was swallowed up in the final catastrophe.
The last meeting attended by Dr. MacPherson was a general meeting of
shareholders of Analogue Controls on March 15, 1965, at which General
Vokes, apparently as a nominee of David Rush, became chairman of the
board, Fred B. Adair became president and Robert W. Quinn, upon
whose knowledge of the potentiometer business many hopes were built,
executive vice-president. There plans were laid to bring together, under
the one roof of Analogue Controls, a pharmaceutical business repre-
sented by Devonshire Laboratories, a potentiometer division, and a
sound division represented by Manhattan Sound Corporation, Man-
hattan West Sound Corporation and another company in New York by
449
Commodore Business Machines
the name of Recording Sound Studios Inc. At the time of Atlantic's
default Dr. MacPherson resigned as a director of Analogue, thoroughly
disillusioned by his business experience.
David and Myer Rush
The spectacle of C. P. Morgan, even at this late date a respected
and trusted financier, sitting down and making plans with David Rush,
a well-known stock market tout, and his even more disreputable brother,
Myer Rush, only slightly in the background, is deplorable enough, but
Morgan had now reached the stage, no doubt with foreknowledge, of
being prepared to go to any lengths to establish his own personal for-
tune. It is not irrelevant to this inquiry to consider at least some of the
facts which were known, or could have been discovered about the Rush
brothers. David Rush in 1964 was 45 years old, and is five years older
than his brother. He had occupied an office in the same building as
Morgan's executive offices when he was publishing the "News Observer".
His promotion of a public issue of shares of John Northway & Sons
Limited, a well-known and long-established Toronto department store
business, resulted in the bankruptcy of the company in early 1963 in
spite of the efforts of Frank Kaftel, a connection which, be it said, David
Rush denied on oath to the United States Securities and Exchange Com-
mission officers who examined him in the Intertel inquiry on January 5,
1966. His criminal record was modest compared with that of his
brother, consisting of a conviction for assault occasioning bodily harm
in 1941, a reformatory sentence of three months definite and three
months indefinite on one count of robbery and two counts of theft in
1944, and a suspended sentence for malicious damage in 1950. His
activities in the United States had involved him in trouble with the
Immigration Department of that country, but as he told the American
examiners, "as a result of my early conviction my honesty became im-
peccable and I am an honest man". He had discovered that Morgan
had a personal interest in Dalite Corporation (Canada), to which large
and improvident loans of Atlantic money had been made, and he found
out enough about other improper loans and transactions to make himself
a nuisance to Morgan and to threaten his peace of mind. The latter
admitted giving him 5,000 shares of Analogue Controls to keep him
quiet, and although David Rush maintained that these were only part
of the 75,000 shares to which Regina Investments was entitled, no pay-
ment was apparently made. The extent to which Regina Investments
was entitled to 75,000 shares of Analogue Controls remains in doubt,
but if Morgan was willing to concede an option, never apparently re-
duced to writing, to David Rush of 75,000 of his precious Analogue
shares at $1.50 per share, the desire to placate him must have been
strong indeed.
450
Chapter VIII
In comparison the criminal record of Myer Rush is substantial.
One must be careful to distinguish it from his police record which is
much longer, for a large number of charges brought against him were
withdrawn, dismissed or dismissed on appeal. He was convicted of theft
on one charge in 1940, on two charges in 1941, all in Toronto, on an-
other charge of theft in the same year in British Columbia, and again
in Toronto in 1943, for all of which he received terms of imprisonment.
He was again convicted of theft in 1944 in Toronto, and again im-
prisoned, having by this time reached the age of 20. In 1947 he was
deported from the United States to Canada after serving a one-year
sentenced for attempted grand larcency, and in 1950 was imprisoned for
illegally re-entering the United States and again deported to Canada.
A number of charges thereafter laid were either withdrawn or dismissed,
until in 1954 he was again imprisoned in the United States for illegal
entry, his sentence being increased by one escape and one attempted
escape from the federal penitentiary in Atlanta, and as a result he was
again deported to Canada in 1956. In 1958 he was imprisoned for
possession of stolen goods and, somewhat surprisingly, released on
parole in 1959. Thereafter he leapt into prominence when he was
beaten in his own Toronto residence by assailants using a baseball bat,
and finally, in November 1967, in the course of the preliminary hearing
on charges against him for conspiracy to defraud and conspiracy to trade
in unregistered securities, he was blown up by a bomb in the Sutton
Place Hotel in Toronto and barely escaped with his life. Although these
last events are not part of his criminal record, and had not yet occurred
in the autumn of 1964, they provide some indication of abnormal
activity.1 By that time this accomplished individual had acquired race
horses, expensive cars, Swiss bank accounts and, according to the local
press, the status of "mining promoter". His known associates included
illegal operators in the securities business with international reputations
as practitioners of organized crime.
The Quickened Pace of Analogue Trading
During a period of seven months prior to July 30, 1964 trading in
the common stock of Analogue Controls had averaged only 138 shares
a day, in a price range of an opening quotation at 85 c4 per share, a high
of $1.05, a low of 55^, and a closing quotation of 75^. Then on July
30, 9,692 shares were traded through Annett Partners Limited at a price
1This was written late in 1967. Since that time Myer Rush failed to appear for trial
in Toronto and forfeited bail of $55,000, was extradited from England after being
apprehended in the act of leaving that country which he had reached by way of
Panama, convicted at the Toronto Assizes on February 3, 1969 of possessing cheques
knowing them to have been obtained by fraud and given the maximum sentence of
ten years imprisonment by the Chief Justice of the High Court. His appeal against
conviction was dismissed by the Court of Appeal on June 25, 1969, but sentence was
reduced to six years.
451
Commodore Business Machines
of 80^ a share, the sale being made by a New York broker and the pur-
chase by Dallas Holdings Limited as to 5,692, and Mrs. Kathleen
Christie as to 4,000 shares. On August 4 a client of Barrett, Goodfellow
& Co. bought 1 ,000 shares at 90^, and Myer Rush and Daytona Invest-
ments Limited, a company wholly owned by David Rush, bought 2,100
shares at 91^ to $1. The next day Rush and Daytona Investments
bought 4,000 shares through three brokers, and there was a purchase by
the Barrett, Goodfellow & Co. inventory account, all these ranging
upward from a price of $1.20 per share. Thereafter, until September
12, the stock traded up to a price of $1 .55. The date of the sale by Com-
modore Business Machines of 332,000 shares to Mortgage Trust &
Savings Corporation (Bahamas) Limited was September 14, and on the
next day a Dow Jones report "came over the wire" in the following
terms:
"TORONTO— DJ— A UNITED KINGDOM PHARMACEUTICAL
FIRM PLANS TO PURCHASE CONTROLLING INTEREST IN
ANALOGUE CONTROLS INC FROM COMMODORE BUSINESS
MACHINES— CANADA— LTD ACCORDING TO A SPOKESMAN
FOR ANALOGUE— CLOSING DATE FOR THE PURCHASE IS
OCT 19
YESTERDAY COMMODORE TO FACILITATE THE TRANS-
ACTION TRANSFERRED ITS INTEREST IN ANALOGUE—
332,000 SHARES— TO A TRUST COMPANY— THE SINGLE
TRANSACTION ON THE TORONTO STOCK EXCHANGE WAS
AT 1 DLR 45C A SHARE
ACCORDING TO THE ANALOGUE SPOKESMAN THE
BRITISH FIRM WILL SELL ANALOGUE'S PHOTO-COPY MANU-
FACTURING OPERATION BACK TO COMMODORE UPON
COMPLETING PURCHASE OF THE STOCK
ANALOGUE CONTROLS WHICH HAS 571,800 SHARES OUT-
STANDING MANUFACTURES VOLTAGE MEASURING DEVICES
IN ADDITION TO DRY-PROCESS COPY MACHINES— THE
COMPANY'S PLANT IS LOCATED AT HICKSVILLE, N Y— V— "
During this period, out of 61,397 shares traded, Myer Rush and Daytona
Investments bought 13,300 shares, and other brokerage accounts in the
names of Gropp, Rabbiah and Swartz, newly opened to trade in Ana-
logue shares and apparently connected with Rush, bought 12,000. Sell-
ing was mainly from New York, and there was some by Kathleen
Christie and Carman G. King. On the whole this was a period of rising
prices in a thin market. The period from September 14 to November
1 9 was of a different order. For much of what follows the Commission
is indebted to the evidence of Mr. R. E. Lavender, the Exchange Exam-
iner of the Toronto Stock Exchange, who testified on June 16, 19661
and who conducted an examination of the trading of the shares of Ana-
'Evidence Volume 45.
452
.
Chapter VIII
logue Controls on behalf of the exchange in May 1965, by which time
the company's failure to furnish full information as to the details of
change of control effected on September 14, 1964, and the pattern of
trading which had become discernible, were causing concern. Mr. Gill-
man's evidence is, of course, the continuing prime source of information
on the subject, particularly in connection with the method by which the
market was supported, and the extent to which C. P. Morgan was per-
sonally responsible for and in control of the acquisition and disposal of
the shares.
Before proceeding further, a word must be said about the nature of
the transaction involving the transfer of 332,000 shares by Commodore
Business Machines to Mortgage Trust & Savings, because it was unsatis-
factory information about this which eventually provoked a thorough
and revealing examination by the exchange, resulting in the suspension
from trading of Analogue's stock before the market opened on May 14,
1965. The Toronto Stock Exchange requires from each listed company
completion of annual questionnaires, and a copy of the annual report
containing financial statements. When there is an intended trade involve-
ing a change of control of the company, information about it must be
supplied and, if required, a filing statement must be submitted, unless
the company concerned has been specifically exempted from such a
requirement. In September 1964 Analogue Controls was an exempt
company. Companies automatically not exempt were mining and oil
companies, except for the larger producers, smaller industrial companies,
and such others as the exchange might designate. The exchange, how-
ever, was in a position to require a filing statement from exempt com-
panies at any time. The transaction on September 14 was a "special
size transaction", involving a lower rate of commission than normally
paid, and requiring special authorization by the exchange, which was
usually given over the telephone in anticipation of a written application.
Such a transaction is completed off the market and is not a "floor trans-
action", as it was described by Weinrott in his letter of October 21, for
two reasons; the marketing of a large block of shares might disrupt
regular trading on the exchange, and the transaction itself might be frus-
trated by portions of the block being pared off in the course of ordinary
purchases and sales on the floor. A special size transaction does not, at
the time approval is granted, as it was for this one on September 14,2
invariably require the giving of detailed information as to the purchasers,
but in a case where change of control appears to have taken place it is
expected. In this case it had, and Weinrott's letter of October 21 was
sent in response to a telegraphic inquiry addressed to the secretary of
Analogue, Morton R. Ruden an attorney in the office of Benjamin H.
Oremland in New York.3 The lapse of a month between the date of
'Exhibit 2449.
'Exhibit 2450.
453
Commodore Business Machines
approval and the making of the inquiry seems to have been unduly long,
and a somewhat leisurely correspondence ensued on the subject, which
eventually exasperated the officials of the exchange to the point where
they were convinced something was wrong and launched their inquiry.
In the meantime much water had flowed under the bridge.
N.G.K. Investments Supports the Market
N.G.K. Investments Limited was a company in which C. P. Mor-
gan held a minor interest, but was conceded complete control over its
management by W. P. Gregory and C. G. King. Morgan employed it to
support the market in Analogue shares between September 22, 1964,
when it made its first purchase, and February 11, 1965, when it made the
last, during which time N.G.K. Investments bought 67,400 shares and
sold 6,300, for a long position of 61,100 and a net cost of $316,491.
The shares purchased were lodged with Barrett, Goodfellow & Co. as
security for margin, and some purchases were financed during the period
by loans from Aurora Leasing Corporation. On October 20, 1964
Morgan signed a delivery slip for Barrett, Goodfellow & Co. indicating
that 2,000 shares of Analogue belonging to N.G.K. Investments were
received by him on that day;1 the books of N.G.K. Investments disclose
no payment for these shares, which on October 20 were selling at $4.15.
On January 28, 1965 the company caused to be delivered 10,000
shares of Analogue to the Royal Bank of Canada at King and Yonge
Streets, Toronto, according to another delivery slip which is accom-
panied by a requisition for securities, noting that delivery was to be
made to the Royal Bank in Montreal for the account of Banque Com-
merciale in Luxembourg. At this point there remained in the hands of
Barrett, Goodfellow & Co. 49,100 shares.
The next distribution was recorded by a letter from N.G.K. Invest-
ments to Barrett, Goodfellow & Co., dated March 31, 1965, enclosing a
cheque for $103,886.94 as payment in full of the margin account, and
requesting the brokerage firm to have ready for delivery for April 1 the
49,100 shares referred to.2 The shares were delivered, and Morgan's
initials appear on the delivery slip.3 There was found in the records of
N.G.K. Investments a copy of a letter, dated February 10, 1965, bearing
the initials "C.P.M." in Morgan's handwriting, and under them the
handwritten words "See Harry", addressed to the branch of the Royal
Bank of Canada at Freeport on Grand Bahama Island, instructing it to
sell 50,000 shares of Analogue Controls at the prevailing market prices
for the account of N.G.K. Investments. In or about the first week of
February Morgan personally opened an account in that branch under
the name "Morgan Trust", and it was from this account that he
Exhibit 2433.
'Exhibit 2435.
8 Exhibit 2436.
454
Chapter VIII
disposed of his accumulation of Analogue shares to Barrett, Goodfellow
& Co. which set up in its own records a brokerage account in the name
of the bank. The manager of the Freeport branch, R. C. A. Lafontaine,
did not testify before the Commission, but Mr. Maurice Clennent, an
assistant general manager of the Royal Bank of Canada in Montreal,
gave evidence as to the nature of the bank's records of the "Morgan
Trust" account in Freeport,4 and copies of the ledger cards were sub-
sequently produced.5 No trace of these instructions in their original
form was found in the Freeport branch. Although shares of Analogue
were being sold on its instructions on and after February 13, according
to both the records of N.G.K. Investments and Barrett, Goodfellow &
Co., and no stock was delivered until April 1, there is no evidence that
the bank was selling on behalf of N.G.K. Investments. That company
did not record the sale of any securities during February but on March
31, 1965, there is a journal entry on sheet No. 23 of the general journal
as follows: "sales of securities 51,100 A. Controls, deposit accounts
C.P.M. April 1 — $100,000, R.Bank April 12 — $169,376"; the addi-
tional 2,000 shares were, of course, those delivered to Morgan in the
previous October. Two deposit slips6 indicate that N.G.K. Investments
on April 1 received $103,000, and on April 12, $169,376, the first being
marked "Aurora $3,000, C.P.M. $100,000", and the books of Aurora
Leasing Corporation recorded an additional loan of $3,000 on this date,
being the day of the discharge of Barrett, Goodfellow & Co.'s margin
account for N.G.K. Investments in the amount $103,886.94. The sec-
ond slip of April 12 is noted "Royal Bank $169,376", and the deposi-
tor's initials are "W.P." for Walter Pahn. With these funds N.G.K.
Investments repaid part of its loan from Aurora Leasing in the amount
of $168,670.32. Since on March 31 and April 1, 1965 the price range
of the shares of Analogue Controls was 6%-6V^ and only about 10,300
shares were traded, and since the sum of $269,376 which are the net
proceeds of N.G.K. Investments' transactions indicates a price of just
under $5.50 per share, it would appear that this company was paid
$50,000 less than the prevailing market price. The 49,100 shares
delivered by Barrett, Goodfellow & Co. into the physical possession of
C. P. Morgan, were, according to a delivery slip of that firm7 and a hand-
written summary of the securities held by Aurora Leasing, s delivered to
it as collateral for the loans of N.G.K. Investments; Aurora retained
24,100 for the moment and delivered back to N.G.K. Investments five
certificates totalling 25,000 shares. These five certificates were then
returned to Barrett, Goodfellow & Co. for the account of the Royal
'Evidence Volume 70.
'Exhibit 3591.
6Exhibit 759.
'Exhibit 2438.
8Exhibit 2439.
455
Commodore Business Machines
Bank of Canada, and a receiving slip of that firm9 for April 1 confirms
this, and indicates that these were in part certificates delivered to the
account of Mortgage Trust & Savings, signed for by Wagman on
December 9, 1964, and apparently derived from N.G.K. Investments in
the first place.
On April 10, 1965, the following letter was written by Lafontaine
of the Freeport branch of the Royal Bank of Canada to Barrett, Good-
fellow & Co.:10
"We enclose 50,000 shares of Analogue Controls Inc., to be disposed
of for our customer as previously arranged by him.
To date we have on file delivery slips showing that you have had de-
livered to you 150,000 shares of the stock up to March 29, 1965. We
are of the opinion that there was a delivery to you on March 31st or
thereabouts of a further 25,000 shares, which receipt may possibly be
in transit to us. Please send us a duplicate receipt in any event, and one
for the enclosed certificates. Your records should indicate that a total
of 225,000 shares have been delivered.
We have received drafts totalling Canadian $600,000 up to March 31,
1965, and on April 9th a further Canadian $350,000 which has been
credited to an account as instructed by our customer. When the balance
of the shares in the account and the enclosed are sold please remit to us".
Barrett, Goodfellow & Co. did not issue a receipt for these shares
for the account of the bank until April 19, and from this receipt it tran-
spires that 35 certificates for 1,000 shares each were those delivered to
N.G.K. Investments on April 1 from Aurora Leasing, and five certifi-
cates for 5,000 shares each those issued to Mortgage Trust & Savings
on December 9, 1964.11
This shrouded and complicated transaction, as it emerges from the
evidence available to the Commission, is susceptible of three possible
explanations. Stating it shortly, N.G.K. Investments recorded in its
books that it had sold 51,100 shares of Analogue Controls on March
31, 1965, but did not indicate who the purchaser was. Of these, 24,100
shares were delivered to Aurora Leasing as security for loans made by it
to N.G.K. Investments, and were subsequently released when the latter
made a partial payment on April 12, with funds received from a source
marked "Royal Bank". C. P. Morgan had obtained, without payment at
the time, 2,000 shares in October, 1964, and paid $100,000 by cheque
to N.G.K. Investments for the remaining 25,000 shares. This may be
explained by: (1) a sale by N.G.K. Investments of 25,000 shares to
Morgan at $4 per share, on a day when the market price was approxi-
mately $6.50; or (2) a sale by N.G.K. Investments of all its shares to
Morgan, who paid for them by his own cheque for $100,000 and a draft
"Exhibit 2441.
"Exhibit 2442.
"Exhibit 2443.
456
Chapter VIII
from the Royal Bank for $169,376; or (3) the sale of the 25,000 shares
released by Aurora Leasing to N.G.K. Investments on April 1 and
delivered to Barrett, Goodfellow & Co. for the account of the Royal
Bank of Canada, which were sold by the bank on behalf of N.G.K.
Investments and paid for on April 12. Whatever the correct analysis
may be, this company, the affairs of which were entirely in the hands of
C. P. Morgan, received $50,000 less for its shares than the contempo-
rary market price as a result of having supported the market throughout
these months, so that Morgan could make other arrangements for the
disposal of the large accumulation by his Bahamian company, Mortgage
Trust & Savings.
Concern and Frustration of the Toronto Stock Exchange
Weinrott's letter of October 21 to the Toronto Stock Exchange1
was far from satisfactory as a source of information, since it did not give
the names of individuals controlling Analogue Controls. On November
5 the exchange wrote to Weinrott asking for names, addresses and occu-
pations of persons having a greater than 5 % interest in each of Cimcony
Limited, Overseas Holdings Inc., Regina Investment, Mortgage Trust
6 Savings Corporation (Bahamas) Limited and Manhattan Sound Cor-
poration, which crossed a letter from F. B. Adair, dated November 4,
containing similar information to that previously provided by Weinrott.2
Weinrott, writing for Cimcony Limited in a letter dated November 26, 3
eventually advised the exchange that the holders of more than a 5%
interest in Cimcony Limited were Carrol M. Shanks, Thomas F. Riley
and George H. Weinrott, and further, that there were no shareholders of
Regina Investment, Mortgage Trust & Savings and Overseas Holdings
having more than a 5% interest in Cimcony Limited. This letter says
nothing about the 25% interest held in Cimcony Limited by Mortgage
Trust & Savings. Then Fred B. Adair, writing for Manhattan Sound on
December 1, informed the exchange that the shareholders of this com-
pany with an interest of more than 5 % were Gustav Mortensen, Dante
A. Saraceni, Donald W. Reid and Adair himself, neglecting to mention
Mrs. C. P. Morgan's 30 shares and, perhaps excusably, C. P. Mor-
gan's interest in Reid's shares.4 Weinrott's letter, in particular, was not
considered satisfactory, and on December 10 the Board of Governors of
the Toronto Stock Exchange published its decision, to designate Ana-
logue Controls as a "non-exempt" company, and required it to submit
a filing statement, in a letter dated December 1 55 and enclosing a set of
filing statement forms. The next communication was provided by Orem-
land's firm in New York which wrote on January 22, 1965, announcing
Jpp. 430-1.
"Exhibits 2451-2.
"Exhibit 2453.
'Exhibit 2454.
'Exhibit 2455.
457
Commodore Business Machines
Oremland's resignation as a director of Analogue Controls and the elec-
tion of General Vokes. The exchange's important letter of December
15, however, remained unanswered. A phone call was made to Adair on
December 23, 1964, and a letter written by Ketchen to Oremland on
January 28° pointing out that Adair had promised the filing statement
by January 15, 1965, and that its immediate receipt was now "impera-
tive". The filing statement was finally forwarded by Oremland on
February 5,7 and on its front page, where there is required "a brief state-
ment of the material change in the affairs of the company in respect of
which this statement is filed" appeared the answer: "Acquisition of
Devonshire Laboratories Limited capital stock for $20,000 (Canadian
funds)". It is surprising that the officers of the Toronto Stock Exchange
did not now realize that they were being toyed with, particularly since
answers to the requirements of the filing statement still withheld infor-
mation or comment upon beneficial interests in the five companies which
were the largest registered shareholders of Analogue Controls. But the
filing statement committee decided on February 1 1 to have another try
at getting some sense out of the company's representatives, and a letter
was accordingly dispatched on February 15, setting out in painstaking
detail what Oremland should do to furnish the required information. In
spite of the strongest possible expression in this letter of the need for
speedy compliance, no reply was forthcoming, and finally on March 19
the writer of the letter of February 15 telegraphed the company requir-
ing immediate submission of a filing statement amended in accordance
with these instructions, which had included disclosure of beneficial owner-
ship of the 332,000 shares held by the five companies. The amended
filing statement arrived in Toronto at some point between receipt of
that telegram and March 25, but no further action was taken by the
filing statement committee because the exchange was beginning to
receive reports of heavy purchases in Europe of Analogue stock, which
was steadily rising in price. It was not until May 10 that W. L. Somer-
ville, the executive vice-president of the exchange, discussed these re-
ports with Lavender, and that the two of them concluded that the market
in Analogue shares was being manipulated. Sales of Commodore Busi-
ness Machines shares in Europe were also being scrutinized at this time,
and Barrett, Goodfellow & Co. and Annett Partners were the two
member firms under study.
The Pattern of Trading in Analogue Stock
After the trading of July 30 when, as has been seen, Annett Part-
ners acted on both sides of the trade of 9,692 shares, that firm was found
to be almost entirely involved with sales, chiefly on behalf of Alan
Christie and his wife and Carman King. It was otherwise with Barrett,
•Exhibit 2457.
'Exhibit 2459.
458
Chapter VIII
Goodfellow & Co., whose inventory account between September 14 and
November 19 bought 35,737 and sold 34,370 shares on steadily rising
prices, from a low of $1.45 to a high of $5.50. It was in the trading of
this account that there was first noticed a prevailing pattern of "uptick"
trades on the last trade of each day. An uptick occurs where the trade
is made at a higher price than that of the immediately preceding trade
for a board lot, or odd lot, and out of 48 trading days during this period
the last trade was on an uptick on 38 days, on 10 it was even, and in
no case was it on a downtick. The significance of the last trade of the
day being thus distinguished is that it is recorded in the press as estab-
lishing the closing price for the day, and has the effect of producing the
appearance of a rising market. In 26 of these 38 cases the buyer was
Barrett, Goodfellow & Co. for their inventory account, or for N.G.K.
Investments, and on one occasion for the R. A. Goodfellow special
account. As a supplement to the pattern of uptick trading, 23 cross-
trades on the floor were revealed, with the Barrett, Goodfellow & Co.
inventory account involved and the firm being on both sides of the
trading. In seven cases the inventory account sold to N.G.K. Invest-
ments, and in four bought from it; in four cases it bought from Dallas
Holdings, the remaining examples involving other clients. Of the seven
sales by the inventory account to N.G.K. Investments five were on uptick,
as were 18 others to N.G.K. Investments not involving the inventory
account. This account was in a long position at all times during the
period, and maintained it by making purchases of 1,500 and 1,000
shares from Dallas Holdings and 1,600 and 600 shares from N.G.K.
Investments on a downtick, a situation where a firm would need its
clients' consent, or would be acting detrimentally to their interests. In
this case the Commission's information is that the clients of Barrett,
Goodfellow & Co., which were under the control of C.P. Morgan, did
give their consent. The R. A. Goodfellow special account supplied 6.000
shares; for the rest, Myer Rush and Daytona Investments bought 1 1,500
and sold 14,800 shares, while the Gropp and Swartz accounts bought
24,100 and sold 6,900. N.G.K. Investments and Dallas Holdings be-
tween them bought 20,700 shares and sold 13,692, and Christie and
King between them sold a total of 22,600 shares. On the whole there
was a predominance of selling by Canadian clients and local stock-
brokers, but the price of Analogue shares rose steadily to $5.50 by the
end of the period.
The third period of the four under which this study of the stock
market trading in the shares of Analogue Controls may be conveniently
divided runs from November 20, 1964 to February 8, 1965, and is
characterized by a steadiness in price, and a higher than average volume
of shares traded. N.G.K. Investments traded every day, except for a
brief period when Manhattan Sound was a major buyer, the former
buying 51,600 shares and the latter 30,000 shares, accounting for 72 r?
459
Commodore Business Machines
of the trading. Purchases were also made by the Barrett, Goodfellow &
Co. inventory account, Mortgage Trust & Savings and Myer Rush, but
Rush was predominantly a seller to the extent of 8,400 shares; he stated
to the Commission that he and his friends sold all their shares at 5Vs
on telephoned instructions given by him from Geneva, and he would
have sold a further 46,000 shares which were held by a broker in Nassau
if his brother David had not purloined them. The Gropp and Swartz
accounts sold 5,000 shares each, and other accounts connected with
Rush 10,700. The Christie accounts sold 3,200, and Carman King
1 1,179 which were, according to the records of Annett & Co., the balance
of his holdings. New York brokers generally were selling to the extent
of some 31,000 shares, buying only 6,500. In the 53 trading days the
low price for Analogue stock on 46 of them was 5Vs, and on a number
of these days this was the only price for the day, which indicated planned
support of the market.
The fourth and final period of trading began on February 9 and
closed on May 13, 1965, and was chiefly significant for the selling by
the Royal Bank of Canada account of 203,000 shares and heavy buying
from overseas. The volume of trading increased from an average of
2,140 shares per day in the previous period to 5,100. It should be re-
marked that the detailed observations on all this trading of Analogue
shares made by the Exchange Examiner were based on his subsequent
written report to the Toronto Stock Exchange, but his preliminary exam-
ination of the situation at Barrett, Goodfellow & Co. on May 1 1 and 1 2
convinced him that the major part of the controlling block of 332,000
shares, about which the exchange had been fruitlessly seeking informa-
tion since the previous September, was being sold on the market through
the Royal Bank account at Barrett, Goodfellow & Co. This account sold
203,000 shares and the inventory account bought 11,709, some from
other accounts directed by C. P. Morgan, and sold 19,053. A total of
161,217 shares were bought for numerous banks, stockbrokers and
individual clients in European countries through 1 8 different firms which
were members of the Toronto Stock Exchange, orders coming from
Belgium, Holland, West Germany, Switzerland, France and Italy. In
addition another member firm in Montreal, L. G. Beaubien & J. L.
Levesque Inc., bought 77,824 shares from Barrett, Goodfellow & Co.,
apparently for European clients, and another 30,430 shares were bought
by Credit Suisse, Swiss Corporation (Canada) Investments and Socan
Incorporated, all of Montreal. Beaubien & Levesque sold only 1,840
shares, and domestic trading had no particular pattern, sales being some-
what ahead of purchases, but in New York brokers were selling rather
than buying in a proportion of over seven to one. Trading in this period
was generally heavy and the price of Analogue shares rose to $7, the
European buying and the selling by the Royal Bank having begun
precisely on the same day.
460
Chapter VIII
Re-entry of Frank Kaftel
On the morning of May 14, 1965, before the market opened, the
shares of Analogue Controls were suspended from trading and have
never since been reinstated. Morgan must have been caught off-balance
by this action, although, as will be seen, a great many of his accumulated
shares had been sold. If the design had really been, as the Rush brothers
assert, to run the stock to $18 or $19 per share, the suspension was a
serious setback to the plans for the Analogue manipulation which had
been laid with Frank Kaftel in Paris, beginning with a second meeting
on December 3, 1964 between him, Morgan and Goodfellow, and set-
tled in the following month, on January 10, 1964, at a third. There was
to be one more meeting between Morgan and Kaftel, when Morgan made
his fourth expedition with Goodfellow on April 4, and it is safe to say
that the progress of the Analogue coup was discussed. Yet it was not
until the I.F.A.S. weekly bulletin of May 4 appeared that Kaftel's general
clientele was invited to participate. The English translation of the rele-
vant material is as follows : *
"A SUBJECT FOR DISCUSSION is to know WHERE one can buy
TO-DAY company stocks which will bring you LARGE PROFITS
TO-MORROW? . . . Which have strong "GROWTH" possibilities? . . .
Which are easily financed thanks to connections and to a Management
which PROVES ITSELF in its undertakings?
In Europe, no bank or financial institution will be able to give you an
UP-TO-DATE report on this company because its power is the result of
recent acquisitions, one of which occurred two weeks ago. . . . The in-
formation available to them dates from 1964. . . . THEY DO NOT
GIVE A TRUE PICTURE.
IFAS HAS THE COMPLETE FILE.
To-day, IFAS recommends an AMERICAN COMPANY quoted on
the Toronto Stock Exchange.
This progressive company may finally become an important element
in the BUSINESS WORLD, thanks to the wide diversity of its activities,
to its solid commercial and financial technique, and to strong PERSON-
ALITIES at the head of each of its departments.
1 ) During the past weeks it has acquired :
RECORDING STUDIOS INC.: one of the first specialists in TV
serials. Has some of the best programmes now showing.
MANHATTAN SOUND and MANHATTAN WEST SOUND: These
two companies have contracts with the most important movie companies,
such as 20th CENTURY FOX, M-G-M, and many others.
'Exhibit 2188.
461
Commodore Business Machines
Their New York studios are WITHOUT COMPARE in this industry.
The new MANHATTAN SOUND film centre has, as it were, united
under the same roof all aspects of the movie industry. It has 90,000,000
feet of film available which it is now offering on a "per foot" basis.
MANHATTAN also has two contracts with U.S.I.A., whereby it
translates the agency's films in 32 different languages for world-wide
distribution. At the top of this business is a well-known man, Fred B.
Adair.
2) "PRECISION POTENTIOMETER" DIVISION
This company, acquired two months ago, is directed by one of the
best-known personalities in the field: Mr. R. W. Quinn, formerly Chief
Engineer, responsible for producing FAIRCHILD CONTROLS. He
has surrounded himself with highly qualified staff.
This division has several brilliant projects for the future and is in the
process of equipping itself to enter the field of conducting plastics.
3) "DEVONSHIRE" DIVISION
In 1964, this was the only interesting side of the company. Now
known as DEVONSHIRE LABORATORIES Ltd. Directed by two
well-known scientists, Drs. Rozee and McPherson, who have created a
new device called INJECTOVIAL. Several large, world-wide PHAR-
MACEUTICAL companies are interested, and this could be a source of
large profits for the company. DEVONSHIRE will be a laboratory with
very diverse activities.
We are in the process of condensing and translating the reports in our
hands, and these will soon be available.
DO NOT DELAY BUY TO-DAY
ANALOGUE CONTROLS, quoted in Toronto
Price: $ Can. 6%
THIS IS A GOOD SPECULATIVE INVESTMENT WITH GREAT
POSSIBILITIES, A SURE WINNER FOR YOUR PORTFOLIO.
(Write us for a condensed translation)"
This was followed on May 11 by a shorter note:
"A. ATTENTION ANALOGUE CONTROLS SHAREHOLDERS.
We were pleased to receive a very large number of requests for the
condensed translation. Because of the volume of the demand, we regret
we were able to despatch these only yesterday. . . . Those who have
not yet written SHOULD DO SO IMMEDIATELY. There is no doubt
that these shares will CONTINUE TO RISE AND THEY SHOULD
BE ACQUIRED AT THE DAY'S PRICES.
462
Chapter VIII
ANALOGUE CONTROLS CLOSED YESTERDAY AT $7 ON THE
TORONTO STOCK EXCHANGE."
Then the bulletin of May 1 8 had to deal with the unwelcome news
of the suspension of trading:
"IMPORTANT COMMUNIQUE FOR ALL ANALOGUE
CONTROLS SHAREHOLDERS.
An unexpected event occurred on Thursday after the Toronto Stock
Exchange closed and we learned of it only when the market opened at
10.30 a.m. in Toronto, or 15.30 hours in Europe. On Friday, most of
our employees leave their work at mid-day, only the administrative staff
remaining. It was therefore impossible for us to pass this information on
to our clients.
We cannot understand what could justify the decision of a
restrictive measure temporarily suspending, on Friday May
14th, the official quotation of the shares of this company.
On Thursday last, after the market had closed, the Stock Exchange
Committee met to decide upon a temporary restrictive measure.
During that day, only 3,080 Analogue Controls shares were traded, the
last price being $6%. This is certainly not a large number of shares
traded. ... In September 1964, 419,260 shares of this company were
traded, ... in December 1964, these shares were traded at a price of
$6Ya at the highest, . . . NOBODY BREATHED A WORD. . . .
When these shares were being traded last December at $6V6, the
company appeared pretty unsubstantial in comparison with what it is
to-day. . . . ANALOGUE CONTROLS is a good and solid company,
well managed, and in recent months it has acquired its Precision
Potentiometers Division, Manhattan Sound Corp., Manhattan West
Sound Inc., and Recording Studios Inc.
THESE SHARES ARE CERTAINLY WORTH MUCH
MORE TO-DAY than the $6Vfc of LAST DECEMBER.
Our opinion is that many of the bears are embarrassed, this
is the snake in the grass.
DO NOT BE DRAWN INTO SACRIFICING YOUR SHARES TO
SATISFY THE APPETITE OF THE BEARS WHO COULD BE AT
THE BOTTOM OF THIS MANOEUVRE. EVERYTHING WILL BE
RESTORED TO ORDER AND THESE SHARES WILL BE
TRADED AT A PRICE HIGHER THAN THEIR MAXIMUM OF
$7. DO NOT LISTEN TO TITTLE-TATTLE. CALL US AT ANY
TIME FOR CORRECT INFORMATION.
These shares are at present being traded over the counter in Toronto
and New York. (Remember the difference in the dollar rate — about
8%)."
463
Commodore Business Machines
The issue of May 25, which dealt scathingly with the detractors
of Commodore Business Machines, had a further note about Analogue
Controls:
"As for ANALOGUE CONTROLS, this same financial journal says:
"From Canada I have been warned against ANALOGUE CONTROLS
INC. This speculative stock has been offered from door to door in
Germany. Its price has dropped sharply. Trading has been suspended
in Toronto. An enquiry into the company has been opened".
We are aware that insurance, bonds, and cosmetics are offered door-
to-door, but we are not aware that ANALOGUE CONTROLS is offered
in this way in Germany. As for "an enquiry into the company has been
opened", this is RIDICULOUS, and we quote below the OFFICIAL
BULLETIN of the TORONTO STOCK EXCHANGE of Friday May
14th.
"ANALOGUE CONTROLS INCORPORATED— Quotation
of these shares will be suspended at the opening to-day pend-
ing examination by the Stock Exchange of the recent manner
in which this stock has been traded".
We do not know what is meant by "manner in which this stock has
been traded", but we do know that the ANALOGUE CONTROLS com-
pany is ABOVE ALL CRITICISM.
Since this stock is actually being traded over the counter, this creates
some confusion, since a number of brokers and banks are giving prices
which are VERY FAR from the really PRACTICAL PRICES. Some
of them have been misled, others are profiting by the chance to BUY
at a LOW PRICE and to RESELL immediately at a HIGHER PRICE.
We shall publish every week in our Bulletin the over-the-counter market
price. You may call us any time.
Due to the NATIONAL HOLIDAY, the Stock Exchange was closed
yesterday. On Friday, over the counter at Toronto the shares were
traded up to $5 Vs. ANALOGUE CONTROLS is not only being traded
over the counter in Toronto, but also in New York.
WE HAVE FREQUENTLY STATED THAT WE ARE NOT
INFALLIBLE, BUT AS REGARDS COMMODORE BUSINESS
MACHINES AND ANALOGUE CONTROLS WE STILL BELIEVE
THAT AT THE PRESENT PRICE THESE STOCKS SHOULD BE
KEPT OR BOUGHT. DO THIS THROUGH YOUR BANK OR
BROKER."
On June 8 problems of Analogue were attributed to short sales in
the following notes:
"ANALOGUE CONTROLS.
The BEARS are trying to satisfy their appetites, but without much
success. Trading last week was up to $43A. Closing price yesterday:
$33^-4.
DO NOT SELL, we believe that everything will TURN OUT RIGHT
eventually."
464
Chapter VIII
The final reference occurred in the issue of June 15, where the price
of Analogue at $3V4 to %V/i was mentioned incidentally to a short item
on Commodore Business Machines.
"Remember May 28th 1962, when DOW JONES dropped 35 points
in one session and dropped 220 points from its annual maximum. It
still came back again and continued to rise. It has been PROVED that
in time, whatever happens, EVERYTHING IS RESTORED TO
ORDER. And remember that existing conditions are BETTER AND
SAFER. SO DO NOT GET EXCITED. There are still many interest-
ing stocks to buy to-day in spite of the present market.
C.B.M.: ($7*6-7V4) . . . ANALOGUE CONTROLS: $3*4-3^".
Morgan's account of his arrangement with Kaftel was given before
the Commission on May 3, 1966.1
"Q. Was it arranged that a substantial number of shares would be sold
in Europe through the agency of Mr. Frank Kaftel from Paris and
Luxembourg?
A. It was done this way. Just off the record —
THE COMMISSIONER: Rather than go off the record for which there
js no authority — this is the sort of thing you do in an examination for
discovery sometimes, but not in these circumstances — if you want to
pause to collect your thoughts on it —
THE WITNESS: No, I can give you the answer.
THE COMMISSIONER: Yes.
THE WITNESS: Could you repeat that question?
MR. SHEPHERD: May the question be read back?
THE COMMISSIONER: Mr. Gillies, can you read Mr. Shepherd's last
question back?
THE REPORTER: (Reads):
Q. 'Was it arranged that a substantial number of shares would be sold
in Europe through the agency of Mr. Frank Kaftel from Paris and
Luxembourg?'
THE WITNESS: Actually the arrangement was different from the way
Mr. Shepherd put the question. Mr. Kaftel got an option on these shares
at $3.50 and he, in whatever manner he uses in creating his public rela-
tions interest in stocks in Europe, interested the purchasers and they
bought stock in the open market and the arrangement was that any sales
that were being made would be made out of an account set up in the
'Evidence Volume 26, pp. 3428-35.
465
Commodore Business Machines
Royal Bank in Grand Bahamas. This meant there may be one thousand
shares go into the open market on order and there might be four hundred
sold out of that account.
In other words, there was never any assurance you would ever get any
of the sales. But he felt that he was strong enough to interest his people
in acquiring these shares. He got the difference between the $3.50 and
whatever the market price was which was set at large by the buying and
selling on the open market. There was no troubled market or anything
of that nature. It was ordinary trading. If the sales were made, the
agreement was that all the sales would come out of the Grand Bahamas
account.
MR. SHEPHERD: Was the arrangement then that Mr. Kaftel would
use his best endeavours to interest persons in purchasing shares of
Analogue Controls and any sales which took place would take place
through the Toronto Stock Exchange where the stock was listed?
A. That is correct.
O. Then was the arrangement that any shares which were sold by
N.G.K., Mortgage Trust and Savings or the other — Manhattan Sound,
Cimcony Limited or other companies if any which then held any of the
416,000 shares that had accumulated would be paid for by the pur-
chasers in the ordinary course but that the vendor company, being
among those I have named, would keep $3.50 per share and if there
were an excess, it would go to Mr. Kaftel?
A. With one exception. N.G.K. was to get their purchase price. The
rest was to go to the other companies on a ratable order.
Mr. Kaftel got — regardless of the shares, he got the excess over $3.50,
but on the division of the proceeds of that account, N.G.K. Investments
got their full purchase price.
Q. Do I understand you to say that so far as Mr. Kaftel is concerned,
he got the excess over $3.50 on any shares which came out of any of
these companies, but internally it was your intention that N.G.K. which
had purchased its shares on the open market and had not received a
portion of the $1.45 shares would get back the sum of money which
they had actually paid out to acquire those shares on the market?
A. That is correct.
Q. Now, the bank account at the Royal Bank of Canada in Freeport,
did you open that account on the day on which the bank opened in the
new premises?
A. Very close to that time.
Q. Did that stand in your name personally?
A. It stood in the name of Morgan Trust.
Q. Which was a nominee name for yourself?
A. Yes, because of the number of people involved in this transaction.
466
Chapter VIII
Q. Did you say Morgan Trust?
A. Yes.
Q. You were the signing officer in respect of that?
A. I was.
Q. I think I have a document some place which would be of some
assistance. I show you a photo-copy of handwritten letter, unsigned,
with the words 'Powell', unsigned and ending with the words 'pleass
check Goodfellow'.
I have reason to believe that is Mr. Kaftel's letter. It was among
your papers. Is that a letter from Mr. Kaftel to you?
A. I can't tell you whether this is his writing or not because I am not
familiar with it, nor have I seen this document or this piece of letter
that I can remember. But it is along the lines we were mentioning.
Q. Yes. It is a handwritten memorandum which was among your
papers, Mr. Morgan.
A. I see.
Q. I thought perhaps you would be able to state it was Mr. Kaftel's?
A. I can't tell you.
Q. In any event —
A. It deals with the subject we have been talking about.
THE COMMISSIONER: On the basis of that identification, do you
want to have it marked?
MR. SHEPHERD: I think I was going to put one more statement,
then —
THE COMMISSIONER: All right.
MR. SHEPHERD: The statements of fact set out in the letter in any
event are accurate?
A. I don't believe they are.
Q. You think they are not accurate?
A. That is right.
Q. Which particular ones do you feel are inaccurate, Mr. Morgan?
A. Well, I should put it this way. I don't know whether this was the
volume. I don't know whether this was the amount they were short and
without having all the facts and figures before me. it would have been
impossible for me to have checked this out. This is only his recapitula-
tion of what took place.
THE COMMISSIONER: That will be Exhibit 1913, I think.
— EXHIBIT No. 191 3: Unsigned photo-copy of handwritten letter com-
mencing 'Powell' and ending "Please check
Goodfellow*.
467
Commodore Business Machines
MR. SHEPHERD: Now, it was necessary, I take it, since the gross
proceeds of sales which were made through the Royal Bank in Freeport
were deposited into that bank to get to Mr. Kaftel his appropriate share.
Is that correct?
A. Yes.
Q. Was this done through the agency of Mr. Julius Schoen who obtained
the moneys in cash from the Royal Bank and took it to Mr. Kaftel?
A. Either he got it in cash or bought drafts in Nassau and disposed of
them. But he handled it out of Freeport.
Q. How did he get it out of the Royal Bank?
A. In other words, I would give him a cheque and the Royal Bank
would cash it for him or I would give him two cheques, one representing
his commission, which I believe was ten per cent.
Q. That is Mr. Schoen personally?
A. Yes. The rest he would purchase a draft either in the Royal Bank in
Freeport or physically take it on a certified basis to Paris or where ever
he met Mr. Kaftel.
Q. He would physically take the cash?
A. The cash or the certified cheque or use the facilities of a private bank
in Nassau for transferring it.
Q. Are you able to state approximately what Mr. Kaftel's profit was on
the transaction?
A. I would say he would get approximately $375,000.
Q. And would Mr. Schoen's ten per cent come off that or would it be in
addition?
A. No, it would be including his.
Q. Mr. Schoen would be entitled to approximately $37,500?
A. Yes. The rest would go —
Q. — to Mr. Kaftel, out of which he paid whatever expenses were
incurred?
A. Yes. He was quite a world traveller."
The document which was put to Morgan and entered as Exhibit
1913 reads as follows:
"Powell —
Analogue
At the time of second meeting you stated you had a position of
416,000 shares. Since beginning Feb. 9 to the 15 of April on the ex-
change there was 261,049 shares traded. You where short 167,950 —
(of which we have not been paid in full) Plus 10,000 shares not on the
Exchange which we got paid 6500 only —
Now according to these figures there should be in other old clients
hands only (50,000 shares). This means you have 239,000 shares still
in your box.
468
Chapter VIII
Powell — Last week we did not work the volume was nothing — Your
long position for week was 1700. (which you can deduct of coming
week). But under these conditions I can't for the life of me see why
when we get going this week we should not get at least 80 to 90% of
volume. Its to screwy. Please check Goodfellow."
The authorship of this, half-acknowledged by Morgan, was flatly repudi-
ated by Kaftel. Expert examination of the handwriting, together with
the signatures "F. Kulunderino" on the Bank of Nova Scotia cheques
drawn on the account of Daylite of Grand Bahama Limited, and speci-
mens of Kaftel's handwriting obtained in Paris, indicate the likelihood
of this note being in Kaftel's hand. The style and content of the docu-
ment make this cautious conclusion virtually a certainty.
Kaftel described in Paris a different arrangement between himself
and Morgan, based on Goodfellow's assurance that Analogue shares had
cost Morgan $2.20 each. According to him the arrangement agreed to
was that the proceeds of all shares sold at a price in excess of $2.20 per
share were to be divided equally between the two of them, after deduc-
tion of brokers' commission. Goodfellow was to keep an accurate record
of the shares sold which Kaftel could check against the reported volume
on the exchange, and the latter was to receive his share of the proceeds
from Jules Schoen. He did not know how much money was paid to
Schoen, and said that by June 1965 Morgan owed him $256,000 as a
result of the Analogue transaction; this had never been paid. When
Mr. Shepherd pointed out to him that payment substantially in excess
of $300,000 had been made to Schoen out of the Morgan Trust account
in the Freeport branch of the Royal Bank of Canada, he acknowledged
receiving some of that money, but not as much as half of it. Schoen had
told him that he had paid other people and given some cash to Morgan.
He had felt that he was not getting his share of the proceeds, and that
shares were being sold off the market of which he had no record. Mor-
gan, he said, had asked him originally to find a purchaser for 10,000
shares at the beginning of the transaction, and this he had done, but
after Analogue collapsed he had been compelled to make good the loss
suffered by the purchaser, a bank, the goodwill of which he had to
retain. No doubt this reference was to the 10,000 shares delivered to
the Royal Bank in Montreal for the account of Banque Commerciale
in Luxembourg. Kaftel denied receiving any benefit from a payment
made from the Freeport account of $58,500 to Atlas Bank Limited, a
self-styled international bank in Nassau under Swiss auspices.
It is difficult to know what to make of this, and it is improbable
that Kaftel was telling the whole truth. He said, however, that he had
been present when Morgan made telephone calls to Switzerland, and he
had formed the impression that Morgan had bank accounts in Lausanne,
469
Commodore Business Machines
Zurich and possibly in Geneva. This would be a convenient thing to say
if he desired to create the impression that Morgan had put beyond
Kaftel's reach a large portion of the profits which should have been his.
At the same time it would be strange if Morgan, now deeply committed
to the underworld of finance, made no use of those Swiss banks which
provide security and anonymity to their depositors.
Complicity of R. A. Goodfellow
Of the complicity of Goodfellow there can be no doubt; both
Morgan and Tramiel treated it as a matter of course, and the report of
the Exchange Examiner is convincing enough. Customers agreement
cards, customarily obtained by brokers from companies trading on
margin, were found at Barrett, Goodfellow & Co. for N.G.K. Invest-
ments, Dallas Holdings, Masco Construction, Valley Farm and Enter-
prises and Associated Canadian Holdings, and the persons entitled to
give direction to the firm respecting their trading were for Dallas Hold-
ings, C. P. Morgan, for Masco Construction and Valley Farm, Harry
Wagman, and for Associated Canadian Holdings, Harry Wagman and
Manfred Kapp. Mortgage Trust & Savings, entirely under the direction
of C. P. Morgan, did not trade on margin. As to the brokerage account
of the Freeport branch of the Royal Bank of Canada, the daily blotters
at Barrett, Goodfellow & Co. showed three different entries as to sales
for that account, which were corrections of entries of the previous day
in each case, showing that these sales had been made for the account of
C. P. Morgan. The explanation given to the Exchange Examiner was
that the order clerk had made an error in the use of the identifying
account number, but since there were identical "errors" on different days,
this statement must be considered a falsehood. During the final period
of trading the R. A. Goodfellow special account was long at the begin-
ning by 6,000 shares, bought another 1,600 shares between February 12
and March 3 and sold the whole 7,600; then, between April 26 and
May 10, a further 19,000 shares were bought and sold, so that at the
end of the period the account was flat. All sales made through this
account were at the same price as those made through the account of
the Royal Bank, and purchases were made at a price of Vs of a point
below the Royal Bank selling price prevailing at the time, which indi-
cates that the R. A. Goodfellow special account was supporting the
market, so that the Royal Bank account would not be compelled to drop
its price. Throughout the whole period from July 30, 1964 to May 13,
1965, excluding from the calculation the "control block" of 332,000
shares, trading through Barrett, Goodfellow & Co. amounted to 30%
of the buying and 42% of the selling, all but 1% of which was done
by the Royal Bank, Dallas Holdings, N.G.K. Investments and other
companies and individuals to which special reference has been made,
470
Chapter VIII
including the Barrett, Goodfellow & Co. inventory account. This trading
may be broken down as follows:
July 30-September 14 buying 13% ; selling 10%
September 14-November 19 buying 28% ; selling 23% (Inventory
account 15%
both buying
and selling.)
November 20-February 8 buying 77% ; selling 5% (45 Vz % of
buying for
N.G.K. and
26V* % for
Manhattan
Sound.)
February 9-May 13 buying 19% ; selling 73% (8% of buying
for account of
Beaubien &
Levesque.)
During the period the Barrett, Goodfellow & Co. inventory account and
the R. A. Goodfellow special account represented 10% of the market
and 13% of all sales, and the Royal Bank account was responsible for
59% of all sales.
Rennie Goodfellow said that Morgan always liked an orderly mar-
ket and movement confined to an eighth of a point. At 8.45 a.m.
throughout this period, in what he described as a "ritual", he gave a
verbal report to Morgan over the telephone. He recalled Jules Schoen
being in his firm's boardroom with Morgan on two occasions, but did
not care to speculate on the subject of their conversation. His attitude
before the Commission was that he at all times merely carried out the
instructions of a valuable and powerful client, without ever questioning
his motives or doubting the probity of his actions. It must be remem-
bered that Goodfellow, at the time he testified, was facing disciplinary
action by the Toronto Stock Exchange, and this may account for, but
cannot excuse, the long series of bland but obvious falsehoods which
he offered as answers to counsel's questions. Two months later, on
August 18, 1966, he was expelled from membership of the Toronto
Stock Exchange and his firm denied the use of its facilities, but he was
permitted to sell his seat in January of the following year. Part of the
exchange's "Note to Members No. 370", may be quoted:
"The Board of Governors found that the member had be.en a party to
or assisted in creating an abnormal market condition in respect to the
shares of Analogue Controls Inc., that in respect to certain information
provided the Exchange the member attempted to mislead the Board of
Governors; that the firm executed transactions in listed securities off the
floor of the Exchange contrary to provisions of the Exchange by-laws.
471
Commodore Business Machines
It was also found that the firm arranged fictitious transactions as regards
the registration of Commodore Business Machines Canada Limited
shares.
As a result of the hearings, the Board found that the method of busi-
ness was unbecoming a member of the Exchange and inconsistent with
just and equitable principles of trade."
Sir Stafford Sands' Position
The exchange was unable to glean, in its inquiries directed to the
Royal Bank, any knowledge of the identity of the customer of the Free-
port branch for whose benefit all this perturbation had been caused; nor
was the Royal Commission any more successful in receiving confirma-
tion from the bank of what Morgan had already admitted in his own
evidence until he, on his death-bed, gave his consent to the bank divulg-
ing this information. The evidence of Clennent was prefaced by a
statement of Mr. C. F. H. Carson, Q.C., appearing on behalf of the
Royal Bank of Canada, in which he set forth the difficulties faced by
the bank, citing the principles enunciated in the well-known case of
Tournier v. National Provincial and Union Bank of England,1 to the
effect that a bank is only relieved of its duty to keep its customers' affairs
confidential in cases where ( 1 ) disclosure is under compulsion of law,
(2) where there is a duty to the public to disclose, ( 3 ) where the interests
of the bank require disclosure and (4) where the disclosure is made by
the express or implied consent of the customer. The bank's dilemma
under the first is illustrated by a letter dated January 10, 1965, but
clearly written in 1966 because of the reference to the Banks and Trust
Companies Regulation Act of 1965, which did not become law in the
Bahama Islands until October 28 of that year, addressed to the General
Manager (International Division) of the Royal Bank of Canada at its
head office in Montreal by the Minister of Finance of the Bahama
Islands in the following terms:
"Dear Mr. Shannon:
In response to your telephone inquiry this morning regarding giving
information to another Government concerning the accounts of cus-
tomers of your Bank maintained in branches of your Bank in this
Colony, the provisions of section 10 of The Banks and Trust Companies
Regulation Act 1965 apply only to officials of this Government. How-
ever, I should say that I and my Ministry would be most disturbed if any
Bank carrying on business in the Bahama Islands were, directly or
through any member of its staff, to disclose any information concerning
the account of a customer maintained with a branch of that Bank within
the Bahama Islands to any other Government. I, therefore, trust that
your Bank will not disclose any such information concerning accounts
maintained with your branches in this Colony to any other Government.
'(1924) 1 K.B. 461.
472
Chapter VIII
If such a disclosure was made otherwise than on the order of a Court
of competent jurisdiction in the Bahamas, this Ministry would have to
give serious consideration to what steps should be taken to prevent a
recurrence of such action by the offending Bank.
Yours faithfully,
'Stafford L. Sands'
Sir Stafford Sands,
Minister of Finance."
This letter, a copy of which was furnished to the Commission by the
bank's solicitors, written by a minister of the Crown who was, or was
about to become a director of the bank in question while still in office,
makes no attempt to enunciate policy based on the laws in force in the
colony, but simply constitutes a naked threat to an institution contem-
plating compliance with the laws of another jurisdiction where it also
does business. If C. P. Morgan had not survived to give, in the last
stages of dissolution, a consent which relieved the Royal Bank of Canada
of the need to choose between compulsion of law in Ontario and minis-
terial displeasure in the Bahamas, the duty of a Canadian chartered bank
doing business in a well-known tax haven and, it must be said with
deliberation, a notorious sanctuary for criminals, might well have been
defined by the courts if the bank had maintained the position which it
had hitherto adopted in relation to this Commission's order to disclose
the identity of the customer who had used its name and its facilities to
manipulate the market in the shares of Analogue Controls.
Results of Morgan's Trading
The results of Morgan's operations in this respect must now be
assessed. After the suspension of trading Fred B. Adair and Morton H.
Ruden attended a meeting at the Toronto Stock Exchange, at which
Adair stated that Manhattan Sound Corporation still held its shares of
Analogue Controls, and that he would inquire from Weinrott as to the
position of the other shareholders. In due course the exchange received
a copy of a telegram from the Bahamas addressed to Adair as president
of Analogue, reading as follows:
"In answer to your call the investment group represented by me went
into another major development requiring several millions of dollars
and needed funds. They therefore sold a substantial portion of their
holdings in Analogue to meet the request of their bankers.
George H. Leinrott"
This message is sufficiently characteristic to dispel any doubts as to its
authenticity arising from minor errors in transmission.1 Weinrott said
in his evidence before the United States Securities and Exchange
'Exhibit 2463, Appendix 5.
473
Commodore Business Machines
Commission taken on January 18, 19662 that he had never seen the
75,000 shares of Analogue Controls which Cimcony Limited had pur-
chased, and the profits from which, on the assumption of a rise in the
price of the shares to $10 or $12, would accrue to it, nor did he ever
receive an accounting from Morgan. The complicated transaction, in
the course of which these shares were paid for with $300,000 of Cim-
cony Limited preference shares, has already been described as a means
of raising $500,000 with which to buy 120,000 common shares of
Atlantic Acceptance from Hugo Oppenheim und Sohn in Berlin. Per-
haps it is sufficient to say that the terms of Weinrott's telegram were
dictated by those of his previous correspondence with the Toronto Stock
Exchange which purported to disclose the identities of the major share-
holders of Analogue Controls, and may in fact have been suggested by
Morgan himself.
Two assumptions had to be made by Mr. Gillman in making his
analysis of the trading by C. P. Morgan and Mortgage Trust & Savings
through the Freeport account, based upon the evidence available at the
time he testified, and the actual results, as has been suggested, and will
be suggested again, must be forever wrapped in mystery. The analysis
which he made was reduced to writing and entered in evidence,3 and
appears below.
ESTIMATED PROFIT REALIZED FROM TRADING IN
ANALOGUE CONTROLS INC.
by
MORTGAGE TRUST & SAVINGS (BAHAMAS) LIMITED
AND C. P. MORGAN
based on the assumptions that
a) Royal Bank of Canada was trading on their behalf and
b) that N.G.K. shares were purchased by C. P. Morgan
PURCHASES
Date No. of Shares From Paid
14 Sept. '64 332,000 C.B.M. (Canada)
Ltd $ 485,550.00
20 Oct 2,000 N.G.K nil
22 Oct 1,100 market 4,510.00
26 Oct 600 market 2,460.00
15 Dec 2,300 market 12,132.50
31 Mar. '65 49,100 N.G.K 269,376.00
387,100 $ 774,028.50
'Exhibit 2479.
•Exhibit 2444.
474
Chapter VIII
SALES
Date No. of Shares From Paid
15 Oct. '64 75,000 Cimcony Limited $ 300,000.00
19 Oct. '64 75,000 Manhattan Sound 300,000.00
20 Oct. '64 2,000 D. Rush nil
12 Feb.- 18 May .. 203,000 Royal Bank 1,190,457.50
Unknown 10,000 S. J. Gould 40,000.00 (est.)
365,000 $1,835,457.50
$1,835,457.50
774,028.50
$1,061,429.00
plus 22,100 shares
Estimated expense based on assumptions that:
a) excess over $4.00 per share on 203,000 shares was paid as fee, and
b) excess over $4.00 per share on sale of 10,000 shares at 5Vk was
paid as fee
a) Fee on 203,000 shares $ 378,457.50
b) Fee on 10,000 shares 11,250.00
Total expense $ 389,707.50
Gross Profit $1,061,429.00
Less Expense 389,707.50
Net Profit $ 671,721.50
Of this amount $300,000 was paid by preference shares of Cimcony
Limited of that par value.
Estimated net position, based on the foregoing assumptions, is, therefore,
that Mortgage Trust & Savings (Bahamas) Limited and C. P. Morgan
or their respective assignees held, at the end of this transaction, free of
all expense, the following:
Cash $371,721.50
Shares of Cimcony Limited,
par value $300,000.00
Shares of Analogue — free 22,100
The assumption that everything received over $4 per share was
paid as a fee was made to make all sales consistent with the $4 per
share price paid by Cimcony Limited and Manhattan Sound Corpora-
tion. The appearance of the name S. J. Gould as a purchaser of 10.000
shares for an estimated $40,000 requires some comment. Stanley J.
Gould was known to Morgan as an associate of Jack Tramiel, and was
at one time on the payroll of Commodore Business Machines for which
he was supposed to do promotional work. This consisted of finding
possible acquisitions for the company and for a president whose acquisi-
tiveness was a salient characteristic. Morgan ruefully complained that
475
Commodore Business Machines
Tramiel would never discuss investment with him until all the details
had been arranged, and would only appear on his doorstep when money
was needed. He believed that Tramiel and Gould planned to go into
the brokerage business in New York, and he remembered having met
Gould as a travel agent on one of his visits to Grand Bahama Island
under circumstances which strongly suggest the latter was acting as a
conductor of parties of gamblers flown to the casino at the Lucayan
Beach Hotel, an activity which is now known to have been promoted
by the underworld. Morgan said further that Gould got his 10,000
shares at the same price as was fixed for Kaftel's "option", which would
be $3.50 per share. Tramiel said that Gould was a "customer's man"
and a "finder", and that he had become very friendly with him. In his
evidence to the Commission he said that Morgan and Gould were in-
volved in some deal with Analogue stock but denied any knowledge of
the details. Item (b), dealing with the expense of sales, refers to the
10,000 shares forwarded to the Banque Commerciale in Luxembourg
at a price of 5Vs, and the assumption is that, in this transaction also,
everything realized above the price of $4 per share was payable as a
fee to Frank Kaftel. Were the lower ceiling of $3.50 per share accepted
in accordance with Morgan's sworn evidence, the net profit would be
reduced by $106,500 and the cash profit would be $265,221.50. Both
Morgan and Kaftel refer to figures of somewhat over 400,000 shares
under Morgan's control, and this calculation may include an additional
30,000 shares bought by Manhattan Sound Corporation, the availability
of which was not sufficiently clear to justify their inclusion among the
assembled shares of Mortgage Trust & Savings and Morgan himself,
which in the aggregate amounted to 387,400 according to Mr. Gillman's
evidence. If Kaftel's recollection of his arrangement with Morgan is
correct, and if they were to divide everything realized over a price of
$2.20 per share, Kaftel's entitlement to profit might have been much
the same as if calculated on the basis of him receiving everything realized
over $4 per share. Indeed, if one takes the 203,000 shares sold from
the Royal Bank account for $1,190,457.50, from a value date of Febru-
ary 12 to a value date of May 18, 1965, half of the receipts over $2.20
per share would amount to $371,928.75, which is very close to the
amount of cash estimated by Mr. Gillman to have remained in the
hands of Morgan, together with $300,000 worth of Cimcony Limited
preference shares and 22,100 shares of Analogue Controls. Morgan
said in his evidence that his own profit out of the trading, after paying
Kaftel, paying off the Mortgage Trust & Savings loan from Aurora
Leasing Corporation and paying what was owing to N.G.K. Invest-
ments, was about $100,000, but he agreed that the profit made on the
sale to Manhattan Sound Corporation of 75,000 shares at $4 would be
additional, less "certain interest that had to be paid". Whatever this may
have amounted to, the gross profit on the sale to Manhattan Sound
476
Chapter VIII
would be $191,250. Since the account at Freeport was used by Morgan
for a number of transactions concerned, for example with the Lucayan
Beach Hotel and others not related to the market operation in the
shares of Analogue Controls, further comment on the status of this
account, and the division of profits with Frank Kaftel, will be made in
Chapter XVIII in the light of documents recovered by this Commission's
investigators from the basement of Morgan's Toronto house, which were
not available to the Commission when Mr. Gillman's evidence was given.
Concluding Observations on the Analogue Stock Manipulation
Some concluding observations may, none the less, at this point be
made. It would be easy to criticize the actions of the Toronto Stock
Exchange taken in connection with the change of control of Analogue,
and the subsequent market operation conducted behind a screen erected
in the Bahama Islands, if one were to forget the unruffled atmosphere
prevailing in September 1964 when the special size transaction was first
disclosed. Thereafter it was quite natural to assume that inquiries made
by the exchange were being dealt with in good faith by those to whom
they were directed, and it was not until the spring of 1965 that rumours
of European buying, added to the difficulty of getting information from
the company and its sponsors, caused the exchange to institute a quick
examination by Mr. Lavender. On the strength of his verbal reports it
acted quickly and decisively, in spite of the serious consequences which
a suspension from trading visits upon the heads of beguiled and inno-
cent purchasers. Even so, the exchange was able to derange the plans of
Morgan and Kaftel, leaving the former with 22,100 of these shares on
his hands which, had his plans materialized, would have been worth a
large sum of money. As for Kaftel, the International Financial Advisory
Service had shot its bolt with the twin fiascos of Commodore Business
Machines and Analogue Controls, and his own involvement in a situation
which, with the collapse of Atlantic Acceptance, became an international
cause celebre. On March 31, 1966 he was expelled from the Grand
Duchy of Luxembourg by ministerial decree.1
In his testimony before the Commission C. P. Morgan sought to
leave the impression that he had taken the majority interest in Analogue
Controls off the hands of Commodore Business Machines, and had dis-
posed of the shares in the best way possible after making this con-
spicuous sacrifice. Nothing could be further from the truth. If it was a
prudent decision on the part of Commodore Business Machines to dis-
pose of an asset which was of doubtful value when it was acquired, it
was equally true that Analogue was the sport of stock-market operators
from the time when Annett & Co. decided to get their customers out
Commission file: Securities and Exchange Commission — letter from Ambassador of
Luxembourg in Washington to Peter J. Adolph.
477
Commodore Business Machines
to the time when its shares were suspended from trading on the Toronto
Stock Exchange. Morgan's acquisition of the shares, reliance on the
Rush brothers to provide a theme for the enhancement of their value,
on Barrett, Goodfellow & Co. and captive companies like N.G.K. In-
vestments to support the market until the iron was hot, and finally on
Kaftel to dispose of the glut of shares which he had carefully assembled,
was deliberately planned, and the whole operation was carried out with
the utmost secrecy and with unremitting attention to detail. Needless
to say, it would have been impossible to contemplate it if Atlantic
Acceptance Corporation and its subsidiary and associated companies
had not been available, and at Morgan's disposal, to provide ready money
on the most advantageous terms for the acquisition of Analogue shares
by him and his nominees. All the money came from this source with
the sole exception of a margin account with Barrett, Goodfellow & Co.
for the benefit of N.G.K. Investments. That this far-flung assault on
the optimism of the investing public, both at home and abroad, was not
more successful in terms of cash in the hands of Morgan and Kaftel was
due solely to the procedures developed and applied by the Toronto
Stock Exchange, and to the resolution with which its officers finally
acted when they found from which quarter the wind was blowing.
Commodore Business Machines Buys Willson Stationers
The story of the involvement of Commodore Business Machines
(Canada) Limited, and its subsidiary and associated companies, with
Atlantic Acceptance would not be complete without some reference to the
transactions in which that company was concerned during and after the
Atlantic default. It will be appreciated that the relationship of Jack
Tramiel with the German bank, Hugo Oppenheim und Sohn, and with the
affairs of the Lucayan Beach Hotel, is yet to be examined in detail. None
the less, a broad outline of the last days of the dependence of Tramiel and
Kapp and their enterprises upon C. P. Morgan must be attempted. Cer-
tainly Morgan's tutelage had been a source of profit; in somewhat less
than five crowded years they had risen from being, with their families,
joint owners of a company with a capital investment of $200 to a position
in the summer of 1963 where they were able to dispose of half a million
dollars worth of the common stock of Commodore Business Machines,
valued at $3.50 per share, and an account of their trading, and the
opportunities which came their way to improve their position in a care-
fully contrived stock-market promotion, has been given at some length.
But their attitude of respectful compliance with whatever Morgan sug-
gested or decided to do was not entirely consistent with the affluence
bestowed upon them, and, particularly in the case of Tramiel, this was
observed to change. He testified that his only serious falling out with
Morgan was over the latter's plans for the Lucayan Beach Hotel, and
478
Chapter VIII
his involvement of Tramiel in the problems of management. Morgan's
wry comment about Tramiel using him only as a source of money has
already been referred to. The truth appears to be that Tramiel's growing
independence of Morgan led him to take an increasingly detached view
of the latter's capabilities and judgment. The creation of Trans Com-
mercial Acceptance and Baronet Associates, and the laying off of one
and a half million dollars of the indebtedness of the Commodore Busi-
ness Machines' group to British Mortgage & Trust, indirectly saved
Commodore Business Machines from being overwhelmed in the Atlantic
debacle. To hear Morgan on this subject it was all arranged by Tramiel
and Kapp at his expense, and Tramiel and Kapp say just as positively
that every move they made was on Morgan's instructions. Both Morgan
and Tramiel had a good deal of vanity in their make-up and saw them-
selves as empire-builders. It has been seen above how Commodore Busi-
ness Machines acquired Pearlsound Distributors, Humber Typewriters,
and, to almost the same extent, Analogue Controls by means which
were concerted between Morgan, Tramiel and Kapp, largely to the
exclusion of Medland, King and Gregory. A parting of the ways was
bound to come, and it did come, as might be expected, when Morgan's
grip on the situation had been loosened by his preoccupation with the
plight of Atlantic Acceptance and his own peril.
The acquisition of the Willy Feiler concern had been a sure-footed
and profitable move, and it had been greatly assisted by luck, because
the correspondence between Solomon & Singer and their Berlin agents,
in the course of closing the transaction in May, 1963, shows quite
clearly Herr Feiler's paternal feelings for Jack Tramiel had been strained
to the limit by his discovery that an audit taken after the price of
D.M. 4,000,000 had been agreed upon showed it to be much too low,
and by Tramiel's drawn-out haggling over Feiler's contract of employ-
ment for the future. The acquisition of Willson Stationers & Envelopes
Limited was of another order. This company was the largest retailer
of stationery and office supplies in Canada. From the correspondence it
appears that negotiations to purchase the controlling interest in this
company from Lawson & Jones Limited of London, Ontario were begun
in March 1965, and minutes of a meeting of the board of directors of
Commodore Business Machines, dated April 7, at which all the directors
of the company, Messrs. Morgan, Tramiel, Kapp, King, Solomon, Med-
land, Wagman, Goodfellow and Gregory were reported as being present,
contained the following reference to the proposed purchase:1
"The President advised the Company that Willson Stationers & En-
velopes Limited has sales of approximately $11,000,000 in Canada and
should show a net profit after taxes of about $275,000 for its fiscal year
ended April 30, 1965. He advised the meeting that Willson Stationers &
'Exhibit 343.
479
Commodore Business Machines
Envelopes Limited had recently hired a top executive formerly employed
with the Eversharp company and he presently was presiding over the
day-to-day affairs of Willson Stationers & Envelopes Limited.
The President further reported that Willson Stationers & Envelopes
Limited would be acquired for its book value as set forth on its financial
statement of April 30, 1965, to be ascertained. He estimated the pur-
chase price at book value to be approximately $5,000,000. However it
further appeared that a large portion of the surplus of Willson Stationers
& Envelopes Limited, being in the vicinty of $2,500,000 would be dis-
tributed by Willson Stationers & Envelopes Limited to its present share-
holders prior to the acquisition of the shares by this Company. In
summary, therefore, he reported that the actual purchase price to the
Company of the shares would be in the vicinity of 2Vi to 3 million
dollars.
UPON MOTION made, duly seconded and unanimously carried IT
WAS RESOLVED THAT a committee be appointed composed of
Messrs. King, Morgan, Tramiel, Gregory and Medland for the purpose
of determining ways and means of raising sufficient funds for the Com-
pany to enable them to purchase the said shares of Willson Stationers &
Envelopes Limited, AND IT WAS FURTHER RESOLVED that this
committee, in their discretion, upon satisfying themselves that such
purchase price could be raised by the Company, be authorized to permit
the Company to enter into a transaction for the acquisition of the shares
of Willson Stationers & Envelopes Limited, as in their discretion they
may determine."
These minutes, as they appear in the book, are unsigned. Tramiel testi-
fied that both Morgan and Gregory had assured him that the money to
complete the transaction would be forthcoming; Morgan denied that
he had ever given such assurance. According to Medland, Morgan had
made the same statement to him, and there can be no doubt that Tramiel
was encouraged to think that Commodore Business Machines would be
supplied with Atlantic funds as heretofore. The various instruments
necessary to conclude the transaction were signed on April 22 with a
deposit of $100,000 being made on that day. Both King and Medland
said on oath that they were opposed to this purchase for the reason that
they thought the necessary funds too difficult to raise and the expendi-
ture unjustified, and additionally in the case of Medland, because Will-
son Stationers was having trouble of its own. Medland said that the
$100,000 payment was made before he, as a director, had been con-
sulted and King, when he read in the newspaper that the acquisition
was to be proceeded with at a time which he thought was shortly after
the Atlantic default, sent in his resignation. In any event, by the end of
May it was clear that neither Atlantic Acceptance nor British Mortgage
& Trust were in a position to accommodate Commodore Business
Machines any further, and what Medland had described as an "emergency
meeting" of the directors was held on June 3, at which time, according
480
Chapter VIII
to the record, Tramiel was authorized to make efforts to obtain $3,-
000,000 from any source at an interest rate of up to 15% per annum.
King is not shown as being present at this meeting; Medland is, and
according to his evidence strongly urged the board to forfeit the
$100,000 deposit and not to proceed further. On June 9 another meet-
ing was held which Medland was unable to attend, but in connection
with which he telephoned the office of Solomon & Singer, speaking
either to Carl Solomon or Irwin Singer, and asked for his opposition
to the purchase of Willson Stationers to be recorded in the minutes. At
this meeting, said to be attended by all the directors except King and
Medland, approval was given to borrowing $3,000,000 from Traders
Realty Limited for six months at an interest rate of 11%, and in neither
the minutes of this, nor of the meeting of June 3, is any mention made of
Medland's opposition. The meeting was adjourned to June 11, at which
time it reconvened with only Tramiel, Kapp, Solomon, Goodfellow and
Wagman being present, and a draft agreement with Traders Realty
Limited, containing a provision that all the shares of the Willy Feiler
company should be transferred to Willson Stationers, was given approval.
At a further meeting on June 22 the resignations of Morgan, Medland,
Gregory and King were formally accepted, the board being subsequently
reduced in number from nine to five. On this occasion, after the collapse
of Atlantic Acceptance and in an atmosphere of impending disaster,
Tramiel and Kapp tightened their grip on the situation by obtaining five-
year employment contracts at salaries of $30,000 and $25,000 respec-
tively, and options for each to purchase 50,000 shares of the company at
$3 per share, the latter as recompense for giving their personal guaran-
tees of repayment to Traders Realty Limited for which, in addition, they
obtained covenants of indemnification from the company and were,
according to Tramiel's evidence, paid 3% of the amount of the loan.
Tramiel's Use of 75,000 Atlantic Shares
What is in many respects part of a more elaborate transaction relat-
ing to the affairs of Atlantic Acceptance and Hugo Oppenheim und
Sohn was the requirement of additional collateral security by Traders
Realty, which took the form of 75,000 shares of Atlantic common stock.
Tramiel testified that in his desperate search for $3,000,000 with which
to complete the transaction with Lawson & Jones he had employed
Wolfgang Wirth, the German bank's manager, to raise all or part of
this sum in West Germany. These shares, a part of 120,000 purchased
by Hugo Oppenheim und Sohn, were thereafter sold to Cimcony Limited
in Nassau on terms that transferred 38,500 shares outright to the pur-
chaser and granted an option to it to buy the remaining 81,500 shares,
according to the English version of the contract, or sold them and post-
poned payment in return for interest on the unpaid balance for a period
481
Commodore Business Machines
of five months, according to the German version. A detailed examination
of this arrangement must be made in the proper place,1 since all the
shares were retained as security under the agreement by Hugo Oppen-
heim und Sohn. Tramiel gave evidence of an understanding with Wirth
that the shares would be transferred to the bank's Canadian subsidiary,
Hugo Oppenheimbank (Canada) Limited, to avoid payment of the with-
holding tax of 15% on dividends payable on these shares to which
Cimcony Limited was expressed to be entitled. According to Wirth,2
Tramiel himself carried the shares back to Canada, and an agreement
between Tramiel and the bank dated July 1, 1965 lists 111,900 shares
of Atlantic Acceptance as being in the possession of Hugo Oppenheim-
bank (Canada).
These certificates were in street form, and once in Tramiel's hands
were used in more than one transaction, but in no case in a more
spectacular manner than when making possible the acquisition of Will-
son Stationers. In Solomon & Singer's files was found an original
executed agreement3 between Hugo Oppenheimbank (Canada) Limited
and Jack Tramiel and Manfred Kapp, reciting that the company as
vendor was the owner of 75,000 common shares of Atlantic Acceptance,
and providing for the sale of these shares to Tramiel and Kapp for $1,-
500,000 or $20 per share, to be paid for by a promissory note due
March 14, 1966, and bearing interest at 6% per annum, and subject to
a put option contract binding the company to repurchase the shares at
any time before the due date for the same price. The date of the agree-
ment was June 11, 1965, and the date of closing June 14; dividends
payable on the shares were to be paid to the company and offset against
the indebtedness of Tramiel and Kapp to it, after and excluding those
payable on June 15. The agreement, which is signed for the vendor by
Tramiel and F. S. Draper, contains a warranty that it is the owner of
the Atlantic shares, and that they are free and clear of "all liens, charges
and encumbrances of every nature and kind whatsoever". They were, of
course, in no such condition, being subject to the right of Cimcony
Limited to compel delivery upon completion of its contract of purchase
and sale concluded with the vendor's parent company in Berlin under
which, in addition, the dividends accrued to the purchaser. Another
document from the same source is an original and executed consent in
the following terms.4
"To: Hugo Oppenheimbank (Canada) Limited
The undersigned shareholder of Hugo Oppenheimbank (Canada) Lim-
ited, hereby consents to the sale by the Company to Jack Tramiel and
'Chapter X.
Commissioner's notes on conversations in Germany.
"Exhibit 997.1.
* Exhibit 997.2.
482
Chapter VIII
Manfred Kapp of 75,000 common shares in the capital stock of Atlantic
Acceptance Corporation Limited, at the price of $20.00 (Canadian) per
share, in accordance with the terms and conditions of an Agreement
dated June 11, 1965.
Dated this 1 1th day of June, 1965.
HUGO OPPENHEIM und SOHN Nachf.,
BERLINER PRIVATBANK, AG.
Per: 'Wolfgang Wirth'
Per: 'Werner Lange' "
The figure "11", occurring in the phrase "dated this 11th day of June,
1965", has been substituted for one underlying it which is not legible.
Tramiel, who had obtained this precious document only eighteen months
before he gave evidence, was quite unable to recollect at what time it
had been executed in Berlin, or under what circumstances he had
brought it back to Canada, except by subsequent reference to his pass-
port, upon which appeared a stamp indicating departure from the
Tempelhof Aerodrome on June 11. His inability to remember the
chronology of these events and the details of any conversation with
Wirth, whereby the latter was persuaded to alienate $1,500,000 worth of
stock which, in the event of payment by Cimcony Limited, he would
have had to buy in the open market for his bank to make good its
contract, is by no means credible; nor is it possible to conclude that the
agreement with Traders Realty,5 dated June 10, whereby Tramiel and
Kapp bound themselves to produce as owners, free and clear of all
encumbrances, 37,500 shares each of Atlantic Acceptance stock, the
agreement between Hugo Oppenheimbank (Canada) and the consent of
Hugo Oppenheim und Sohn had all been executed in the space of two
days. Tramiel, indeed, admitted that the agreement with Hugo Oppen-
heimbank (Canada), and the consent of its parent company, were not
executed on the same day. Both documents were without doubt drawn in
the office of Solomon & Singer, the latter taken to Berlin beforehand by
Tramiel. To pursue the matter further would be tedious, but it may
suffice to say that Tramiel and Kapp, at a profit to themselves, were able
to secure the vital loan from Traders Realty to Commodore Business
Machines on terms which exposed Hugo Oppenheim und Sohn to ruin.
Morgan said that he heard "by the grapevine" of the appearance of the
75,000 shares as collateral in the Willson-Commodore Business Ma-
chines-Traders Realty transaction while attending a directors' meeting,
presumably of Atlantic Acceptance, and that Medland had phoned
either Solomon or Tramiel to protest and to demand that it proceed no
further. He was told in reply that Tramiel and Kapp were lawful owners
of the shares. Medland made no mention of this, and Morgan may have
5Exhibit 3420.
483
Commodore Business Machines
confused it with Medland's earlier intervention on the subject of Willson
Stationers, but Morgan was always sensitive about the appearance in
unexpected places of Atlantic stock, and there is no doubt about his
concern on this occasion.
The purchase of Willson Stationers was concluded on June 23.
One of its aspects must be shortly referred to. Fenix Manufacturing
Limited was a company subsidiary to Commodore Business Machines,
and on this occasion played its brief part in the affairs of the complex.
It was a private company, incorporated in Ontario on September 25,
1963, with a share capital not exceeding $40,000 of which three common
shares, valued at $1 each, had been issued to Irwin Singer, Morton Gold-
har and Patricia Ann Weir. Its stated objects indicated that the company
was intended to be a manufacturer and importer of high fidelity phono-
graphic equipment and other related products. By February, 1965 the
three directors were Singer and two employees of Commodore Business
Machines, Hans Vogt and F. S. Draper. No business was carried on by
the company until June 21, 1965, when its capital was increased by
letters patent adding 3,600 preferred shares at a par value of $10 each
and 4,000 common shares without par value, and it thereupon acquired
complete ownership of Willy Feiler Zaehl-und-Rechenwerke GmbH from
Commodore Business Machines. Payment was made by the issue of
3,997 shares of Fenix to Commodore which were assigned a value of
$880,100. Then, on June 23, Willson Stationers bought the same number
of shares of Fenix from Commodore Business Machines for a stated
price of $3,000,000, pledging the shares in payment, and Commodore
Business Machines in turn pledged them with Traders Realty, together
with a $3,000,000 debenture, bearing interest at 11%, issued by Willson
Stationers to Commodore Business Machines, and a mortgage of real
estate owned by Willson Stationers and its subsidiaries. In addition to
this security Traders Realty, of course, had the note of Commodore
Business Machines, 75,000 shares of Atlantic Acceptance and all the
shares of Willson Stationers in pledge, a release and reconveyance from
the Montreal Trust Company with respect to the charge and obligations
of Commodore Business Machines under the trust deed securing the
Series A debentures of November 1962, and warrants to purchase
10,000 common shares of Commodore Business Machines, not as
security but as an absolute transfer. Traders Realty was, as it turned out,
amply secured, but its officers must have had some bad moments with
their shares of Atlantic Acceptance, which, when the terms of the loan
were settled on June 10, were one thing, and by the date of closing
of the purchase of Willson Stationers on June 22 quite another. Appar-
ently Fenix Manufacturing was only interposed between Willy Feiler
and Willson Stationers to avoid any possible taxation in West Germany
on the transfer of ownership in Willy Feiler.
484
Chapter VIII
The Atlantic Crisis and its Effect on Commodore Business Machines
The directors of Commodore Business Machines, meeting on June
22, are recorded in the minutes as discussing ways and means of with-
drawing from the agreements with Lawson & Jones, and being advised
by their solicitors that this was impossible. The prospect of raising
$3,000,000 in six months' time without losing Willy Feiler, their prime
asset, and meeting, as they fell due, the obligations of the company, rep-
resented by its debentures, preference shares and loans from companies,
control of which had been rapidly assumed by Montreal Trust Company
and the Clarkson Company Limited, was enough to shake the stoutest
heart. After the palmy days of doing business on the elastic terms af-
forded by the Atlantic companies under Morgan's direction, the terms as
to security imposed by Traders Realty provided a sharp lesson in busi-
ness conducted at arm's length. Blocking every avenue of escape from
the consequences of Jack Tramiel's thirst for expansion, so recently
slaked by Carl Solomon's persuasiveness in the conference rooms of
Traders Group, lay the massive claims advanced by the Montreal Trust
Company for Atlantic on the one hand, and on the other by British
Mortgage & Trust Company, soon to be made formidable by its amal-
gamation with Victoria and Grey. Willson Stationers & Envelopes Lim-
ited must be disposed of at all costs, even if this established Canadian
company, stripped of half its surplus, were put on the block for the
highest foreign bidder.
It is impossible not to admire, at this juncture, the resolution of Tra-
miel and Kapp, as they gazed in the summer of 1965 on the collapse of
all their calculations and the ruin of their hopes. As will be subsequently
seen, Tramiel was at the same time in serious trouble in Berlin. Wolf-
gang Wirth of Hugo Oppenheim und Sohn, who had little love for him
and his associates, describing them as the "Canadian bandits", could
not refrain from expressing to the Commission his admiration of the
coolness and even temper with which Tramiel faced the outraged central
banking authorities of the Federal Republic. This was not, and probably
never had been the man who appeared, on his own showing, to be the
dutiful and helpless instrument of Morgan's schemes. An interesting
sidelight on his behaviour is cast by the evidence of one Max Block Jr.,
an American attorney acting in the interests of Robert Quinn, new gen-
eral manager of Analogue Controls Inc., who came to Toronto with his
associate Stern to persuade Morgan to release funds from Baronet Asso-
ciates which would allow Analogue to meet its payroll. Morgan appealed
to Tramiel, and Tramiel's refusal was adamant. Block's impression, given
at his examination by the Securities and Exchange Commission in New
York, was that Tramiel was the master and Morgan the suppliant.1 Tra-
miel himself testified that Morgan asked him to have Trans Commercial
Acceptance release the securities pledged with it by Analogue, saying
JExhibit 4067.
485
Commodore Business Machines
that he was working closely with the Montreal Trust Company; Tramiel
decided that Morgan was a broken man, and that, as he himself put it
with more delicacy, no confidence could any longer be placed in his
judgment. Thereafter, he said, his whole concern was to get assets of
Trans Commercial Acceptance and Baronet Associates into the hands
of the Clarkson Company. It was otherwise with those of the company
which he rightly estimated to be his real strength and his hope for the
future. The minutes of the meetings of directors of Commodore Business
Machines, and Tramiel's report to its shareholders in the annual report
for the year ended June 30, 1965, are full of comments about the "harass-
ment" of the company by its creditors.
Irving Gould and the Sale of Willson Stationers
The first objective was to sell Willson Stationers. The resolution to
do so was taken at a meeting of the board of Commodore Business
Machines on August 10, 1965, a meeting at which a further option to
buy 50,000 shares of the company's common shares, at the reduced price
of $2 a share, was granted to each of Tramiel and Kapp in consideration
of their giving their personal guarantees of the company's indebtedness
to Traders Realty Limited. A document dated August 13, 1965, executed
by Tramiel and Kapp for Commodore Business Machines, gave Amber
Holdings Limited, of Nassau in the Bahamas, an exclusive agency to sell
the company's 49,000 shares of Willson Stationers, and to retain any ex-
cess over $3,000,000 of the purchase price as its commission. Amber
Holdings was a company created and controlled, for the benefit of mem-
bers of his family, by Irving Gould, president of Superpack Corporation
Limited and Jaypen Holdings Limited, the latter being a moneylending
enterprise. Gould said, in his examination under the Securities Act by
Mr. Shepherd and Mr. Cartwright,1 that he had first met Tramiel in July
or August of 1965 and had discussed the situation and prospects of
Commodore Business Machines with him. The agreement as to the com-
mission of Amber Holdings, and the financing which now ensued by
Jaypen Holdings, provide a measure of the desperate situation in which
Commodore Business Machines found itself. On August 10 a loan of
$20,000 was made by Jaypen Holdings and repaid one month later. On
August 31a loan of $100,000, repayable in 90 days, was provided from
the same source. At a meeting of the board held on August 26 a special
resolution was passed to rescind the section in the company's general
by-laws permitting the shareholders to remove a director before the ex-
piration of his term of office by two-thirds of the votes cast at a general
meeting; the request of W. A. Farlinger of the Clarkson Company that
a nominee of the Montreal Trust Company should be appointed to the
board, and that he should be allowed to inspect the books and records
of the company, was rejected on the advice of the president. An extract
from this minute is worth quoting.
Exhibit 3699.
486
Chapter VIII
"In view of the adverse publicity already surrounding the Company
with respect to its alleged connection with Atlantic Acceptance Corpora-
tion Limited, and in view of the knowledge that Montreal Trust Com-
pany and The Clarkson Company Limited have the role of Receivers in
connection with Atlantic Acceptance Corporation Limited, public
knowledge that Montreal Trust Company or The Clarkson Company
Limited were either investigating the affairs of Commodore Business
Machines (Canada) Limited or that their representatives sat on the
Board of Commodore Business Machines (Canada) Limited would fur-
ther create adverse publicity for this Company and perhaps have the
effect of projecting in the minds of the public the idea that Commodore
Business Machines (Canada) Limited was in shaky financial condition."
The irony of this statement would not be appreciated by the public until
March 9, 1966, when the financial statements of Commodore Business
Machines for the year ended June 30, 1965 were at length furnished,
virtually at pistol-point, to the Canadian Stock Exchange.
Irving Gould wasted no time in finding a buyer for Willson Station-
ers & Envelopes. He was spurred on by the knowledge that default had
already occurred under the $3,000,000 floating charge debenture given
by Willson Stationers to Commodore Business Machines and assigned to
Traders Realty, and that the appointment of a receiver was imminent.
By undertaking to pay $100,000 to the New York City brokerage firm
of Shearson, Hammill & Co., he arranged a sale of all the shares of Willson
Stationers owned by Commodore Business Machines at a price of $67
a share, in accordance with the terms of a draft agreement dated Septem-
ber 8, to an American company, Boise Cascade Corporation. The offer
was accepted at a directors' meeting on October 1, the same day as
Harry Wagman's resignation from the board, and the transaction may be
illustrated, in the first place, by a statement of receipts and disbursements
sent by Solomon, Singer & Solway to Commodore Business Machines
dated November 3, 1965.
STATEMENT OF RECEIPTS AND DISBURSEMENTS
Total sale price (49,932 shares
at $67.00 per share): $3,345,444.00
Paid to discharge Traders Realty
Limited loan: $2,962,239.02 ]
Paid Traders Realty Limited
interest for October 4, 1965: .. 887.38 ]
Paid Arthur Andersen & Co.,
as per direction: 21,500.00
Paid Borden, Elliot, Kelley &
Palmer as per direction: 21,445.31
Paid to Amber Holdings Limited
as per direction : Selling
Commission 339,280.00 3,345,351.71
OUR TRUST CHEQUE ENCLOSED HEREIN: $~ 92.29
487
Commodore Business Machines
The records of the Solomon & Singer tmst account for Commodore
Business Machines indicate that the amount of $339,280, described as
"selling commission", was paid to Shearson, Hammill & Co. in respect
of $100,000, Commodore Business Machines, $162,000, treated as a loan
from Jaypen Holdings, Jaypen Holdings itself, $14,280 and Solomon &
Singer, $63,000 for fees and disbursements applicable to the purchase
and sale of Willson Stationers, the last being a very considerable pay-
ment by any standards, and, since this document was used for audit pur-
poses, studiously concealed. This sum was also treated as a loan to
Commodore Business Machines by Jaypen Holdings. According to
Gould, Jaypen Holdings owed $225,000 to Amber Holdings in respect
of these advances.
Tramiel's statement to the shareholders of Commodore Business
Machines in the report for the year ended June 30, 1965 contains the
following comment on the purchase and sale of Willson Stationers:
"Though in the final analysis a loss was sustained, we would point out
that the sale price was in excess of the purchase price, the loss being
attributable to expenses of acquisition and sale". The cost of acquisition
was $3,084,353, and the proceeds of the sale, as indicated above, were
$3,345,444. Although these figures would appear to produce a difference
of $261,091, note 2(c) to the consolidated balance sheet contains the
following comment: "This company was sold subsequent to balance sheet
date. As a result of the sale, a loss of $1 17,322 was sustained". The com-
pany's loss was in fact far greater, and is illustrated by the following
calculation of cost made by Mr. Wolfman.
Costs of Purchase
Commissions paid on acquisition to Kalesky (broker) .... $ 87,500.00
Fee paid to Arthur Andersen & Co 21,500.00
Payment to Jack Tramiel — for C.B.M. warrants to
bonus Traders 20,000.00
Payment to Manfred Kapp — for C.B.M. warrants to
bonus Traders 20,000.00
Canada Trust Co. — Depositary fees 4,347.10
Fees of Solomon and Singer ($5,000 of this does not
appear in the S. & S. Fee Register) 40,668.28
Fees of Solomon and Singer — Agents Costs 2,405.87
Fees of Wagman, Fruitman & Lando 50.00
$196,471.25
Cost of Holding
Interest paid to Traders $100,441.39
Less: Interest earned on charges to
Willsons 93,123.29
7,318.10
Interest charge re guarantee of Traders
loan re Atlantic Shares (75,000) 31,067.82 $38,385.92
488
Chapter VIII
Cost of Sale
Legal Fees of Solomon & Singer $ 15,000.00
Legal Fees of Borden, Elliot & Co 21,445.31
Commission to Amber Holdings Limited
Paid to: Shearson,
Hammill & Co $100,000
C.B.M. — re Jaypen
Loan 162,000
Solomon & Singer —
re Jaypen loan 63,000
Jaypen Holdings .. 14,280 339,280.00 375,725.31
Total Costs of Acquisition & Sale less recovery
from Willson $610,582.48
The payment of $20,000 to each of Tramiel and Kapp for the sur-
render of their warrants to purchase shares of Commodore Business
Machines, to provide the required bonus for Traders Realty, which could
only be justified by the holders exercising them at a price of $8 per share,
appears to be indefensible, but is completely in tune with the constant
harping, in the minutes of the meetings of the board, on the sacrifices
made by the president and vice-president in giving their personal guaran-
tees of repayment of the loan of $3,000,000 made by Traders Realty
Limited, a gesture which was merely a pledge of diligence, and exposed
them to no more than the absolute ruin which already stared them in
the face. The investment in Willson Stationers, in the teeth of everything
which could be called independent advice and solely at the instance of
Jack Tramiel, was disastrous for the shareholders of Commodore Busi-
ness Machines, but had two positive results: it enriched Tramiel and
Kapp to an extent which is even now unfolding, and it delivered the
future of the company into the hands of Irving Gould. Of Irving Gould
it had been said, in words attributed to Tramiel in the minutes of a direc-
tors' meeting of August 26: "Because of that Broker's connections in the
foreign financial markets and further because in his opinion the repre-
sentative of the brokerage firm was a most highly respected and repu-
table person, it would be in the company's best interest to secure the
friendship of that person and in order to do so it was necessary to grant
the exclusive rights to sell the shares of Willson Stationers and Envelopes
Limited to that Broker." It must also be said, in the public interest, that
on January 20, 1960 he pleaded guilty to a charge of perjury arising out
of a knowingly false statement, made on oath to the Ontario Securities
Commission in the course of an investigation of a company called
Cabanga Investments Limited. It should be added that every considera-
tion was given to the accused because he had lied to protect his brother,
subsequently sentenced to a long term in the penitentiary, and had
489
Commodore Business Machines
admitted doing so. He was permitted to plead guilty in the obscurity of
the magistrate's chambers, and sentence was suspended.
On the morrow of the sale of Willson Stationers, Tramiel wrote the
following letter to Gould's company, Amber Holdings, dated November
8, 1965. The original spelling has been preserved.
"Gentlemen:
As you are aware, the sale of Willson Stationary and Envelopes Ltd.
has been consumated successfully and, again, we would like to indicate
our appreciation for the expeditious manner in which this transaction
was carried out.
This of course does not put an end to our financial problems, and,
accordingly, we are writing to you at this time to indicate our wish for
you to proceed to negociate any of the following types of transactions
for the company :
( 1 ) Re-financing of the present indebtedness.
(2) Additional financing over and above the present indebtedness.
(3) Sale of all or part of the assets of the Company.
On the basis of your efforts resulting in any successful conclusion to
any of the foregoing, we would pay you a fee of 2*4% of the total
amount involved on each transaction.
We trust that you will make your best efforts to ensure that the loan
of $325,000. — which is presently outstanding to Jaypen Holdings Lim-
ited will be maintained until such time as the Company has sufficient
funds to repay this indebtedness.
Yours very truly,
COMMODORE BUSINESS MACHINES (CANADA) LTD.
JACK TRAMIEL
President"
Sale of Willy Feiler and the Irish Operation to Litton Industries,
and Settlement with Victoria and Grey Trust Company and
Montreal Trust Company
A special bank account was established into which all proceeds
from the accounts receivable of Commodore Business Machines were
paid, and for which Irving Gould had indispensable signing authority,
since Jaypen Holdings had taken a general assignment of book debts to
secure its various loans. In the spring of 1966 there occurred the climax
of Gould's efforts, of which the tax-exempt Amber Holdings was again
to be the beneficiary, when Litton Industries Inc. of New York agreed
to purchase the Willy Feiler company, still held by Fenix Manufacturing
Limited, the interest of Commodore Business Machines in its agreement
with Office Electronic Machines Limited, a new name for Typewriter
Sundries Limited, bestowing the exclusive right to distribute in North
America the Willy Feiler or "Quick" adding machine, and the under-
490
Chapter VIII
taking of Commodore Industries Limited at Shannon in Ireland, for a
price of almost $3,800,000; the whole transaction was made contingent
upon a settlement with Victoria and Grey Trust Company and the Clark-
son Company Limited. This offer was considered of sufficient importance
to require submission to a special general meeting of shareholders, to be
held in conjunction with the annual meeting on April 26, 1966, at which
time and at long last the financial statements for June 30, 1965 were
also presented; one, as it were, offsetting the other. The minutes of a
meeting of the directors of Commodore Business Machines, held on April
11, 1966 and attended by all the directors of that date, Tramiel, Kapp,
Solomon and Goodfellow, set out the terms of the settlement with the
two trust companies and the Clarkson Company in the form of resolu-
tions taken at the meeting. With respect to Victoria and Grey the rele-
vant resolution was as follows;
"BE IT RESOLVED THAT:
1. The entering into by the Company of an agreement with Victoria
and Grey Trust Company dated April 7, 1966, (an executed copy
of which is to appear as Schedule 'C to the minutes of this meeting)
providing, among other things, for the sale by Victoria and Grey
Trust Company and the purchase for cancellation by the Company
of Series A Debentures in the aggregate principal amount of
$50,000, Series B Debentures in the aggregate principal amount of
$450,000, Series C Debentures in the aggregate principal amount
of $500,000, the Subordinated Notes in the aggregate principal
amount of $950,000 and 94,000 Preference Shares with a par value
of $10.00 each, for the aggregate purchase price of $1,500,000 and
the issue and allotment to Victoria and Grey Trust Company of
50,000 fully paid and non-assessable common shares of the Com-
pany, all on the terms and conditions set out in the said agreement,
be and the same is hereby approved, ratified, sanctioned and con-
firmed and the action of Mr. Kapp, the Secretary of the Company,
in executing under the corporate seal of the Company and delivering
the said agreement be and the same is hereby approved, ratified and
confirmed.
2. Forthwith upon the closing of the agreement with Victoria and Grey
Trust Company, the Company do and it is hereby authorized to
redeem all its then outstanding Debentures, Subordinated Notes and
Preference Shares in accordance with the provisions relating to
redemption of the respective securities."
As a supplement to this agreement, Tramiel and Kapp advised the meet-
ing that Victoria and Grey had agreed to sell to them, or their nominees,
135,778 %o common shares of the company at a price of $1.50 per
share, and to give them an option to buy the 50,000 common shares
allotted to the trust company for the same price, within a year from the
date of the agreement. The claims of the Montreal Trust Company and
491
Commodore Business Machines
the Clarkson Company were settled by the payment to them jointly of
the sum of $600,000, and the purchase from the latter of 104,930 com-
mon shares for $1.50 per share, the latter transaction being a condition
of the settlement. In rounded figures, therefore, and subject to minor ad-
justments, the company was able to settle the substantial claims of Vic-
toria and Grey Trust Company, and to redeem $3,890,000 worth of debt
and equity instruments, for an expenditure of only $1,575,000. In addi-
tion, Commodore Business Machines was able to settle the large actual
and contingent claims of the receiver and manager of Atlantic Accept-
ance, and of the Clarkson Company as trustee in bankruptcy for many
of its creditors, amounting potentially to $4,575,000 or thereabouts, for
$600,000. At the same time the board of Commodore Business Machines
was induced to make a payment in excess of $30,000 to secure Tramiel
and Kapp against any further claims by the trust company for the unpaid
balance of their personal loans, not affected by the discounted rate of
the general settlement. The shares which Tramiel and Kapp were obli-
gated to purchase were paid for with the commission earned by Amber
Holdings for disposing of the Willy Feiler and Commodore Industries
Limited assets, plus additional moneys, involving a total of over $230,000
according to Irving Gould's evidence, and apparently, by addition of the
foregoing figures, 240,708 shares. The actual purchaser was Irving
Gould's other company, Jaypen Holdings, which thereupon became in-
debted to Amber Holdings for the purchase price advanced. Tramiel and
Kapp were given an option to purchase half of the shares so acquired,
not yet exercised at the time Gould gave his evidence on July 20, 1966.
In the upshot, and in accordance with the agreement of Victoria and Grey
Trust Company, all the debentures, preference shares and subordinated
notes of Commodore Business Machines were forthwith redeemed, to a
face value of $3,864,500, for $2,530,000 in cash.
This brief and somewhat cursory account of the extrication of Com-
modore Business Machines from the perilous situation in which it had
found itself as a result of the purchase of Willson Stationers & Envelopes
Limited, contemporaneously with the collapse of Atlantic and the dis-
appearance of British Mortgage & Trust Company as it was formerly
constituted, may be concluded by saying that on October 28, 1966,
Irving Gould and his nominee David Perlmutter, C.A. became directors
of Commodore Business Machines, and Gould in addition became chair-
man of the board and chief executive officer of the company. In the in-
terim and thereafter Tramiel and Kapp turned away from their previous
preoccupation with Central Europe, and sought manufacturing facilities
and long-term financing from Japan with the assistance of another Gould
company situated in Nassau, entitled Geneva Trust Company Limited.
At the time of writing, the price of Commodore Business Machines stock
is once more advancing on the Canadian Stock Exchange, and there is
every sign of the organization of a market to relieve the company's prin-
492
Chapter VIII
cipal officers of the large accumulation of common shares in their hands,
or subject to options in their favour. The materials which have been re-
ferred to were, in many instances, not entered as exhibits in the public
hearings of the Commission, since these were not principally concerned
with events which occurred after June 17, 1965, but are contained in the
files of the Commission. The history of Commodore Business Machines
was for so long part of the story of Atlantic Acceptance Corporation,
and its protagonists Jack Tramiel and Manfred Kapp so closely associ-
ated with C. P. Morgan, that no final comment should be attempted
here. The affairs of the company, its subsidiary and associated com-
panies, and their principals and employees, must be repeatedly referred
to in later chapters of this report.
493
CHAPTER IX
Lucayan Beach and Dalite
The Bahama Islands
Of the multitudinous transactions of Atlantic Acceptance Coropora-
tion examined by the Commission, many of which, although resulting in
substantial loss, must be only briefly referred to, none was more consid-
erable than that which involved it in the affairs of Grand Bahama Island.
Grand Bahama is one of the largest and most northerly of the Bahama
Islands, which lie over a great expanse of ocean to the east and south
of the Florida peninsula of the United States. With the exception of the
tiny island of Bimini, it is the closest of the group to continental
America, its westerly tip being less than 75 miles from Palm Beach to
the west, and some 120 miles from Miami to the south-west. For this
reason, Grand Bahama, with its few inhabitants at the settlement of West
End, played a prominent part in the rum running activities which sprang
up during the period when the Eighteenth Amendment to the Consti-
tution of the United States was in force, and which enriched residents of
other inhabited islands of the archipelago as well. The illicit trade was
doubtless a tame successor to those of piracy and wrecking which had
made the islands infamous since the seventeenth century, and it is to be
doubted if anything like the profits made in Canada during the same
period, and out of the same trade, were made in the Bahamas. None the
less, connections with the largest organized criminal community in the
world were inevitable after this experience of the convenience of "off-
shore" operations, and are now a factor to be reckoned with in the field
of licensed gambling. In this chapter of the report I shall endeavour to
show how Atlantic Acceptance, beginning in 1963, was progressively
involved with developments in Grand Bahama Island and with the pri-
vate empire of one Wallace Groves, founder and protagonist of Grand
494
Chapter IX
Bahama Port Authority, so that, at the time of the collapse in 1965,
upwards of $11,000,000 of its money had been irrevocably committed
in the form of loans upon security of demonstrably little value, or upon
no security at all. This involvement, and the resulting loss of liquidity
which developed towards the end of 1964 and in the early part of 1965,
may be said to have been the proximate cause of Atlantic's failure,
although it by no means lay at the root of the company's difficulties. It
developed along familiar lines: C. P. Morgan actively participated by
personal investment in the ventures to which loans were made, as if the
problem of conflict of interest did not exist, and without the knowledge
of his board of directors from whom the extent of the company's com-
mitment, and his own private interest, were effectively and deliberately
concealed.
The Bahamas are a British Crown colony, and have been governed
directly by the Crown since 1784 when it acquired the interests of their
South Carolinian proprietors, as a result of the great influx of Loyalist
planters and their slaves after the American Revolution into the virtu-
ally uninhabited islands. The governor appointed by the Crown admin-
istered the colony through his Executive Council and the Colonial
Secretary, a Colonial Office official, with a Legislative Council, a
majority of the members of which he appointed, and a House of Assem-
bly performing roughly the same function as did those of Upper and
Lower Canada before the Act of Union in 1841. It was not until Janu-
ary 1964 that a new constitution was introduced giving executive respon-
sibility to those local representatives who controlled a majority in the
House of Assembly, or in other words establishing responsible govern-
ment as it is now generally practised under the British parliamentary
system. Only foreign affairs, defence and internal security remained in
the governor's hands, and preserved in theory, if less absolutely in fact,
the islands' colonial status. Although the new constitution provided a
significant change in the law, for practical purposes the internal affairs
of the colony had for many years been dominated by the United Baha-
mian Party, control of which was in the hands of the merchants and
professional class of Nassau, the capital of the colony, on the island of
New Providence. It would be unrealistic to suggest that this political
party did not enjoy the support of large numbers of the overwhelmingly
negro population of the Bahamas, although dominated by the white
minority in whose hands the economic as well as the political mastery
lay, but it is significant that in January, 1967 the Progressive Liberal
Party, which had provided parliamentary opposition to the United Baha-
mian Party for several years, and was almost entirely negro in member-
ship, defeated the ruling ministry and assumed power. The principal
reason for the decline of public confidence in the United Bahamian
Party was its handling of licensed gambling in the colony, and particu-
larly on Grand Bahama Island.
495
Lucayan Beach and Dalite
Growth of Licensed Gambling
Gambling, or more specifically carrying on a lottery, or keeping a
gaming house for purposes of gain, was an offence under the Penal Code
of the Bahama Islands, but in 1939 the law was changed to allow the
Governor-in-Council to issue certificates of exemption from its effect in
special cases. Since 1920 a discreet and exclusive gaming house had
been operated at the Bahamian Club in Nassau during the tourist season,
and is still in operation on a less restricted scale. This had been toler-
ated by the authorities until another small establishment opened on
the island of Cat Cay, and it became evident that the situation should
be regularized without altering the general application of the existing
law. No taxation was imposed upon the two concerns exempted, and
gambling was confined by the terms of the certificates to visitors, and
to those persons who were not born in the colony and were not gainfully
employed therein. All further applications for certificates of exemption,
and attempts to ameliorate the provisions of the Penal Code in relation
to gambling, were rejected and discountenanced by the government,
which was supported in this negative policy by public opinion, particu-
larly as represented by the clergy and the press, until on April 1, 1963,
at the behest of influential members of the Executive Council and
notably by Sir Stafford L. Sands, the Governor, Sir Robert de Stapel-
don Stapledon, was induced to sign, in circumstances of remarkable
secrecy, a certificate of exemption in favour of a company called
Bahamas Amusements Limited in respect of gambling casinos on Grand
Bahama Island. Sir Stafford Sands, who was attorney for the applicant
and was under the new constitution in 1964 to be Minister of Tourism
and Finance, has already been referred to in the previous chapter, and
became in 1966 a director of the Royal Bank of Canada, the oldest and
largest international bank doing business in the islands, a step which,
if taken in Canada by a minister of the Crown, would be considered
glaringly improper, but in the Bahamas appeared to be a matter of
course, and perhaps a wise precaution on the part of financial institutions
doing business there. The excuse offered on behalf of Sir Stafford and
other members of the government, who pursued their private vocations
resolutely and profitably while performing the function of ministers, was
that they received no official emoluments, and that conflict of interest
could not be said to exist. The transparent speciousness of this argu-
ment requires no further comment, but it is significant that the present
ministry has introduced legislation for the payment of ministers in the
usual way. Let it suffice that the grant of a certificate of exemption to
Bahamas Amusements Limited for Grand Bahama, later extended to
other parts of the Colony, led directly to the development of a situation
which attracted the attention, first of the Wall Street Journal, and later
of other sections of the international press, and produced so much
496
Chapter IX
unfavourable comment in and outside the Bahamas that the United
Bahamian Party government led by the Premier, Sir Roland Symonette,
itself proposed to ask for the appointment of a Commission of Inquiry,
and this proposal was implemented by its successors after the general
election of 1967. The Commission of Inquiry was appointed by the
Governor on March 9, 1967 under the presidency of Sir Ranulph Bacon,
and included a Detective Superintendent of the Metropolitan Police in
Great Britain and a Canadian chartered accountant, Mr. Vernon Turley
of Montreal. The Commission, which was required to report by October
31, 1967, was at first given only three months in which to transact its
business and produce its report, and was considerably hampered in its
efforts by its inability under the provisions of the local Commissions of
Inquiry Act to compel the production of documents, "an astonishing
omission" as the Commissioners say. None the less, and quite apart from
the interest and importance of its findings and conclusions as to the busi-
ness of casinos in Freeport and in Nassau, the report provides convenient
and authoritative information about the origin of the development of the
great concession granted by the colonial government to Wallace Groves
and his associates on Grand Bahama Island, in which the principal
settlements are Freeport and Lucayan Beach, frequently referred to with
singular lack of verbal artistry as Freeport/Lucaya.1
Report of the Commission of Inquiry into the Operation of Casinos
No more concise or authoritative account of the recent develop-
ment of Grand Bahama Island may be given than by quoting paragraphs
37 to 42 of this report. In reading these extracts it should be bome in
mind that references to the "Port Authority" are to Grand Bahama Port
Authority Limited, to "the Development Company" to Grand Bahama
Development Company Limited and to "the Amusements Company" to
Bahamas Amusements Limited, all of which were Bahamian corpora-
tions.
"37. Mr. Wallace Groves, a Wall Street financier, may be said to be
the architect of the present prosperity of Freeport. He first visited the
Bahamas in the early 1930's where he purchased a small island known
as Little Whale Cay some 30 miles northwest of Nassau. In 1946 his
Canadian born wife, Mrs. Georgette Groves, acquired all of the capital
shares of an old established timber company called the Abaco Lumber
Company Limited. That company originally had timber concessions in
Abaco, but by the time of Mrs. Groves' purchase it had transferred its
activities to Grand Bahama. In the late 1940's Mr. Groves began to
consider the idea of a large scale development on Grand Bahama. His
original scheme was for the creation of a completely free port on the
Bahama Islands: Report of the Commission of Inquiry into the operation of the Busi-
ness of Casinos in Freeport and in Nassau, H.M. Stationery Office (856177) Dd. 391800
2000 11/67.
497
Lucayan Beach and Dalite
Island; all imports and exports handled through the port would be free
of customs duty. He discussed this idea with Sir Stafford Sands, a
practising Bahamian attorney and Member of the House of Assembly,
who had already become a close friend of his. Sir Stafford was unable
to support such a project since, in the absence of any income or profits
tax in the Colony, the financial mainstay of the Government was the
imposition of customs duty. The creation of a completely free port
anywhere in the Bahamas would have proved to be a large drain on the
Treasury. However, the idea persisted in Mr. Groves' mind, and in 1953
he suggested a formula to Sir Stafford Sands whereby all consumer goods
brought into the Island would be liable to import duty but that all manu-
facturing and building materials necessary for the economic development
of a specific part of the Island could be imported duty free. All articles
manufactured in that area were also to be duty free on export. By these
means Mr. Groves hoped to create a flourishing trading and industrial
development on this hitherto totally undeveloped Island. The idea com-
mended itself to Sir Stafford who canvassed the proposal with some of his
colleagues in the House of Assembly and proceeded to draft what is
known as the Hawksbill Creek Agreement.
38. This Agreement took the form of a contract between the Port
Authority, a Bahamian company formed by Mr. Groves for the purpose,
and the Governor in Council. The latter was authorised to enter into
such an agreement by the Hawksbill Creek, Grand Bahama (Deep
Water Harbour and Industrial Area) Act (Chapter 235) enacted on
20th June, 1955. This Statute merely recited that the Governor in
Council was authorised to enter into an agreement with the Port
Authority, the substance of which was set out in the Schedule to the
Act, for the dredging of a deep water harbour and the establishment of
an industrial area at and in the vicinity of Hawksbill Creek on Grand
Bahama. Under the Agreement, which was entered into on 3rd August,
1955, the Government agreed to grant a conditional purchase lease to
the Port Authority of 50,000 acres of Crown land surrounding Hawks-
bill Creek and a conditional purchase lease of the sea bed of Hawksbill
Creek. In consideration of this grant the Port Authority covenanted to
dredge a deep water harbour at the Creek and to construct a wharf there
to accommodate cargo vessels. It also undertook to promote and en-
courage the development of an industrial area in the 50,000 acres of
Crown land so leased and in a further 1,500 acres purchased or to be
purchased by the Port Authority in the near vicinity. The whole of this
area for development was and is termed the Port Area, but is now better
known as Freeport. The Agreement also imposed upon the Port Au-
thority the duty to provide, within the Port Area, living and office
accommodation for certain Government officers and employees, schools,
medical services and facilities. The Agreement allowed for the importa-
tion into Freeport of all materials and supplies, other than consumer
goods, free of customs duty into the Port provided that they were neces-
sary for work on the Port project itself, the construction or building and
operation in the Port Area of civil engineering works, factories and
498
Chapter IX
business premises, utility undertakings and other business ventures oper-
ated by or licensed by the Port Authority. In addition, no export duties
were to be charged on any goods exported from the Port Area.
39. The above is only a very sketchy and incomplete outline of the
provisions of this Agreement. The various privileges, powers and obliga-
tions of the Port Authority thereunder are too numerous and detailed to
be set out here. In some respects the effect of the Agreement was to give
almost feudal powers to the Port Authority, but it imposed heavy obliga-
tions on that company as well.
40. Initially, the principal investor in the Port Authority was Mrs.
Groves' Abaco Lumber Company Limited. Later, other substantial inter-
ests invested in the project and the position is now that approximately
50 per cent of the shares are owned by that company, approximately 25
per cent by members of the Hayward family in the United Kingdom,
approximately 25 per cent by an American group of investors, a rela-
tively small number of shares by Mrs. Groves personally and less than
1 per cent by Mr. Groves. It can be seen, therefore, that Mrs. Groves,
through her interests in the Abaco Lumber Company Limited still has the
majority holding in the Port Authority of which, however, her husband
is the President. Mr. Groves told us that he receives a reasonable salary
for his work in that connection. He has apparently no financial interest
in any other company in the Bahamas save for the nominal sharehold-
ings requisite for him to be elected a Director of various subsidiaries of
the Port Authority. There is now a large complex of these subsidiaries.
Despite his personal lack of shareholdings in the Port Authority and its
subsidiaries, Mr. Groves obviously plays a dominant part in the company
complex, whilst his wife, who apparently holds the purse strings, does
not. It may be that Mr. Groves' American citizenship, which renders him
liable to U.S. income tax wherever he is, has led him so to arrange his
affairs in the Bahamas that his British wife, who is not subject to income
tax, is the legal owner of his small empire and of the income which it
produces.
41. Despite the considerable concessions conferred on the Port Au-
thority in 1955, the concept of a large trading and industrial area did
not materialise as rapidly as had been anticipated. By 1960 there was
only one undertaking of any size — Freeport Bunkering Company. Indus-
trialists were reluctant to invest in projects in the area because of the
lack of sufficient entertainment and recreational facilities for personnel
who would have to be persuaded to come and live on the Island.
Accordingly, in 1960 the Port Authority turned its attention to the
residential and tourist development of Freeport. This necessitated an
amendment to the 1960 Agreement which is set out in the Schedule to
the Hawksbill Creek, Grand Bahama (Deep Water Harbour and Indus-
trial Area) (Amendment of Agreement) Act (Chapter 236) which was
enacted on 9th June, 1960. Under this amendment the total size of the
Port Area was roughly trebled and the Port Authority was authorized to
sell for residential purposes land which was originally allotted to it in
499
Lucayan Beach and Dalite
1955 for industrial development. The Port Authority further agreed to
build in Freeport by 1st December, 1963, at least one first class hotel of
200 bedrooms.
42. In 1961 Mr. Louis Chesler appeared on the scene. He is a
Canadian who had a number of substantial business interests in the
U.S.A. and Canada. In particular, he was a major shareholder in the
General Development Company of Florida which had just completed
one of the largest and most successful land developments in the U.S.A.
at that time. He was a highly experienced man in land development.
Indeed, he was described by Sir Stafford Sands as the most outstanding
real estate salesman he had ever come across. Mr. Gonsalves, President
of the Amusements Company and former President of the Development
Company, somewhat wryly categorised him as "a high promotional
individual". It was in keeping with his somewhat flamboyant nature that
he was a compulsive gambler. He was introduced to the possibilities of
development on Grand Bahama by Sir Stafford Sands. He met Mr.
Groves and between them they formed the Development Company in
1961 to which the Port Authority conveyed approximately 100,000 acres
for the purposes of development and tourism. In exchange for this con-
veyance, the Port Authority received half of the capital stock of the
Development Company. Thus, the principal shareholders in the new
Company were:
(a) The Port Authority with a 50 per cent shareholding representing
about $12,000,000;
(b) Laredo Uranium Mines Ltd. a Canadian company, with a share-
holding of 203A per cent, The Seven Arts Company Ltd., also a
Canadian company, with a shareholding of 20% per cent, and
Mr. Chesler, with a personal shareholding of 8Vd per cent —
together representing an investment of about $12,000,000.
Mr. Chesler was a major shareholder in both Laredo Mines and the
Seven Arts Company and thus had a measure of control over 50 per
cent of the stock of the Development Company, of which he was made
President. With this injection of new capital and new blood into the
Freeport project it was everybody's hope that the development of the
area would proceed considerably faster than hitherto."
As a footnote to this account, it should be said that "Laredo" is
properly spelled "Lorado" in the title of the company referred to, the
error no doubt being due to the similarity of pronunciation of the two
words. It should also be said that the filing statement of Seven Arts
Productions Limited, filed with the Toronto Stock Exchange on August
29, 19611 asserts that its interest in Grand Bahama Development is
to be held by a wholly-owned subsidiary, incorporated for the purpose
in the Bahamas, and that the Lorado interest was to be held by another
subsidiary of Lorado Uranium Mines called Lorado of Bahamas Limited.
Exhibit 2640.
500
Chapter IX
L. A. Chesler and the Hotel Project
Louis Arthur Chesler voluntarily appeared before this Commission
on October 6, 1966. This was several months earlier than his appear-
ance before the Bahamian Commissioners, who animadverted severely
upon the credibility of his testimony before them, and upon his responsi-
bility for introducing members of the American underworld into the
management of Bahamian casinos through his connections with Myer
Lansky, commonly held to be an associate of the Mafia and described
by Chesler, in his Bahamian testimony, as the "Dean of Gambling". His
evidence here,1 unconnected as it was with this delicate subject, ap-
peared to be sufficiently candid and reliable. He was born in Belleville,
Ontario on February 4, 1913, was educated at Peterborough High School
and the University of Toronto, and spent many years with the Toronto
stock-broking firm of Draper, Dobie & Co. With the considerable for-
tune made by him in Florida real estate, Lorado Uranium Mines and
Seven Arts Productions, he moved to the Bahamas in 1961, and became
president of Grand Bahama Development upon its incorporation, resign-
ing in 1964 after fundamental disagreement with Wallace Groves.
One of the commitments made by the Port Authority to the Baha-
mian Government, in consideration of the almost manorial rights con-
ferred upon it by the Hawksbill Creek Act, was for the construction of
a "de luxe" resort hotel of no less than 200 rooms. This obligation was
assumed by Grand Bahama Development Company and the hotel,
construction of which according to Chesler commenced in August, 1962,
was built as part of an elaborate scheme of development on the beach
at Lucaya, on the south shore of Grand Bahama and on lands conveyed
to Grand Bahama Development Company by the Port Authority. Be-
hind the selected beach was a large swampy area, connected with the sea
by an opening known as Bell Channel, and the plan called for dredg-
ing of the swamp to form an artificial lagoon to the north of the beach
on which the hotel was built, and the erection in this lagoon of a
"marina", with mooring slips and a shopping centre connected with
additional residential accommodation called a "motel" or "boatel", these
being words of slang coinage which must unfortunately be used from
time to time because of their lamentable currency. To the northward
and inland from the lagoon construction was begun on a golf course for
the Lucayan Country Club. The grand design is illustrated by an artist's
aerial view contained in a brochure called "Lucaya Today"2 which
is reproduced overleaf. The whole project was not completed as por-
trayed, as will be seen, but it is of interest because it shows with accuracy
the situation of the hotel and the marina, and the general arrangement
of the dredged lagoon described as Bell Channel Bay. The contract for
Evidence Volume 70.
2Exhibit 2639.
501
(4)
„-/>. 4&t
©
(D
J/l ciwam ~ttu.it ij Udt tatuu...
and u t'tjicii cf t/'u fot.
(U
i
i
Lucayan Beach and Dalite
the construction of the hotel, which was to have 254 rooms and public
areas of a size that would appear only to justify an eventual complement
of 500 rooms, was awarded to the Taylor Construction Company of
Florida, which shortly after beginning its work went into bankruptcy as
a result of prosecutions against it undertaken by the Bureau of Internal
Revenue of the United States. The hotel was to cost $6,000,000 on a
"cost-plus" basis and, according to Chesler, ultimately cost $9,000,000
because of serious underestimates by the contractor, the foreman of
which, Charles Martin, completed the building, almost entirely as re-
quired by the end of 1963, under the corporate name of Lucaya Con-
struction Company Limited, originally a subsidiary of Grand Bahama
Development Company. One of the factors which Chesler cited as
having contributed to the greatly inflated cost of the Lucayan Beach
Hotel, was compliance by the latter company with what he said was a
request by the government to build a casino in the hotel complex. As
to the extent that the initiative for this project was supplied by the gov-
ernment, recourse must again be had to the report of the Bahamian
Commissioners.
"59. On 1st April, 1963, the Governor in Council granted to the
Amusements Company a Certificate of Exemption to operate an un-
limited number of casinos, each to be in or in conjunction with an hotel,
on the Island of Grand Bahama for a period of ten years. The circum-
stances which led to the making of the application for this Certificate,
and those surrounding its grant by the Governor in Council, require
careful consideration.
60. During 1962 it became increasingly apparent that the Freeport
area was not developing as rapidly as had been planned. Land sales
were far below the level necessary to justify the enormous investment
which the Development Company had already made in that area, and by
the latter half of the year that Company was running into severe finan-
cial difficulties. In these circumstances Mr. Groves and Mr. Chesler
began to consider what further steps were required to boost the land
sales programme in, and the commercial development of, the Freeport
area. Not unnaturally Mr. Groves sought the assistance and advice of
his friend and attorney of many years standing, Sir Stafford Sands. The
latter, who had been Chairman of the Development Board since 1950,
had considerable experience in dealing with problems such as this. His
public responsibilities in that capacity and his keen interest as a friend
and attorney of Mr. Groves made him an obvious person to whom to
turn.
6 1 . These three men concluded, and we think rightly, that the relative
failure of the Freeport development was due to the lack of sufficient high
class hotel accommodation, and recreational and sporting facilities on
the Island. Without such amenities, Grand Bahama, as one of the most
flat and least attractive islands in the Bahamas, was unlikely to attract
sufficient tourists, settlers and investors to sustain the vast development
504
Chapter IX
of Freeport on which so much had already been invested. Something had
to be done, and done quickly, to remedy the situation.
62. The panacea prescribed by Messrs. Groves and Chesler, with the
active encouragement of Sir Stafford Sands, was the introduction of
casino gambling to Grand Bahama. We do not know exactly when this
decision was finally reached. On the evidence before us it looks as if it
evolved gradually over a period of time in the latter half of 1962 — a
period during which the Development Board also had such a possibility
under review. It is highly probable that all three men had been interested
in such a project as early as 1961 before the urgent need arose to provide
a stimulus to the development of Freeport. Nevertheless the need for
such a stimulus by the end of 1962 provided both the occasion of, and a
real justification for, the decision to seek a Certificate of Exemption for
the Island of Grand Bahama.
63. The scheme devised was a sound one. It provided initially for
the opening of one large casino as an integral part of the Lucayan Beach
Hotel which was already under construction at Lucaya in Freeport.
Not only would the proposed casino be a great attraction for tourism
purposes, but its profits would be used to subsidize the building of
new hotels and, indirectly, the improvement of sea and air connections
with the Island. Such profits as would remain after these obligations had
been met would be handed over to the Development Company, on whose
financial support the casino operation would depend in its early days. If
the scheme worked well, it was envisaged that further casinos would be
opened on the Island on a similar basis at a later stage. The new venture
was to be financed equally by Mr. Chesler and Mrs. Georgette Groves,
the wife of Mr. Wallace Groves. Sir Stafford Sands, in his capacity as an
attorney, was given the task of drawing up the scheme in detail and of
presenting the application to the Governor."
The Gambling Concession to Bahamas Amusements Limited
The Bahamian Government were not unmindful of the dangers of
granting this valuable concession, at this time unencumbered by taxa-
tion, to persons and under circumstances over which it could not exer-
cise decisive control. As in the case of the original agreement under the
Hawksbill Creek Act, the shareholdings in Bahamas Amusements Lim-
ited, incorporated for the purpose of applying for the certificate of
exemption on March 20, 1963, did not, any more than in the case of
those of Grand Bahama Development Company, ostensibly provide for
participation by Wallace Groves himself, a United States citizen and a
former inmate of a United States federal penitentiary. Out of author-
ized share capital of 500 <£1 Class A shares and 500 <£1 Class B
shares, 498 of the former were allotted to Chesler and 498 of the latter
to Georgette Groves, the promoter's wife, both of whom were British
subjects. The remaining four shares were issued singly to the nominees
505
Lucayan Beach and Dalite
of Chesler and two directors of Grand Bahama Development Company,
all of whom were likewise British subjects. The terms of the agreement
between the Governor, Chesler and Mrs. Groves, which appears to have
been executed on the same day as the grant of the certificate of exemp-
tion to Bahamas Amusements Limited, April 1, 1963, were summarized
by the Bahamian Commissioners in paragraphs 81 and 82 of their
report. In addition, I also quote paragraph 83, not only because of its
intrinsic interest, but because it reveals the extent to which the resources
of the Port Authority and the Grand Bahama Development Company
had been stretched by undertakings of which the building of the Lucayan
Beach Hotel was by no means the least, but, in view of the development
of the deep water harbour at Hawksbill Creek and the establishment of
commercial enterprises in Freeport, was perhaps not the greatest.
"8 1 . The full text of the agreement is set out in Appendix IV to this
Report (Document 3). We set out here a summary of its more impor-
tant provisions. The prior written approval of the Governor in Council
was required before there could be any increase in the capital of the
Company, any alteration in the Memorandum or Articles of Association,
or any change in its directors. Mr. Chesler and Mrs. Groves each under-
took to deposit all their share certificates in the Company with the Trust
Corporation of the Bahamas Ltd. They also undertook jointly with the
Government to sign a letter of instruction to the Corporation requiring
it to hold those shares in its custody until receipt of a further letter jointly
signed by them, or the survivor of them or their personal representatives,
and the Government, requiring their delivery to the Government or to
them or their repective personal representatives. In the event of either
director wishing to sell his or her shares, they were bound first to offer
them to the Government at par. Such shares could only be bequeathed to
their respective spouses, children or other direct descendants. A transfer
was not to be approved by the directors of the company until the trans-
feree or transferees had undertaken to deposit the share certificates with
the Trust Corporation under a similar agreement with the Government.
82. In the event of the Governor in Council having any reason to
suspect that the control or management of the Company or of any casino
operated by the Company was being exercised by persons other than Mr.
Chesler or Mrs. Groves or their appointed directors, Mr. Chesler and
Mrs. Groves could be required by the Governor in Council to submit the
matter to arbitration in accordance with the provisions of the Arbitration
Act of the Colony. If it were found on arbitration that the suspicions
of the Governor in Council were correct, all of the A shares and all of
the B shares were forthwith to be offered to the Government at par.
Notification to Applicants of the Success of the Application
83. The Governor authorised Sir Stafford Sands to inform his clients
of the success of their application, but, as recited in the Colonial Secre-
tary's letter of 29th March, there was otherwise to be no publicity of the
506
Chapter IX
matter until the Certificate was formally granted. We have heard two
contradictory versions about the manner in which this good news was
first communicated to the applicants.
(a) Both Mr. Groves and Sir Stafford Sands gave evidence that on the
morning of March 28th the latter telephoned the former (who was not
strictly speaking his client in the matter) and told him the news. This
account is supported by a photostat copy of a handwritten letter from
Mr. Groves to Mr. Chesler dated that same day which was made avail-
able to the Commission. The letter (Document 76) read as follows:
'Dear Lou, 28th March, 1963.
Stafford called me this A.M. The news is of course grand and
definite. Vote 5/3. I do not know full details but gather RTS voted
No.
Stafford is really concerned over leaks, rumours, etc. and says that
the matter can still be defeated. It will take two weeks more or less
for certificate of exp. to be signed and in addition he has promised no
publicity until after return from England. Stafford blames S. Kelly
and us (He thinks you). Please, please, be careful.
Elis of Freeport News (and one other) says you laid at Caravel
Bar 50 to 1 bet that there would be gambling in Freeport before end
of year and Frank Stream told all over that Wednesday was D. Day —
and that you did. We are being flooded with requests for information.
Too bad.
Do hope you feel better.
I am now most concerned over money and think a meeting must
be held on that soon.
My Best,
Sincerely,
WALLACE.'
The reference to RTS in that letter was to Sir Roland Symonette.
Both Mr. Groves, who admitted writing the letter, and Sir Stafford Sands
firmly denied that the information contained therein as to the voting in
Executive Council was given to Mr. Groves by Sir Stafford. If it had
come from that source, the latter would have been in breach of his oath
of secrecy as a Member of the Council — an oath to which he and all his
former colleagues in that body were so concerned to adhere when giving
evidence before the Commission. Mr. Groves gave us the rather unsatis-
factory explanation that he obtained the information about the voting
from general gossip in the Bahamas — be it noted only one day after the
matter had been discussed in Council. In view of the wording of the
letter, we find it hard to believe that Mr. Groves was not referring in
this particular to information which Sir Stafford had given to him on
the telephone. In a matter in which secrecy had been of the utmost
importance to those concerned and so well kept, it is unlikely, in our
view, that within a day general gossip in the Bahamas would have
disclosed to Mr, Groves in Freeport a confidential detail such as this.
507
Lucayan Beach and Dalite
(b) Mr. Chester denied that he had ever received the above letter
and gave us an account which was totally inconsistent with it having
been written at all. He said that both he and Mr. Groves were told of
the success of the application by Sir Stafford Sands in the latter's office in
Bay Street, Nassau, immediately after the matter had been discussed in
Executive Council on March 27th. On this broad issue of the manner in
which the decision of the Governor in Council was first communicated
to Messrs. Groves and Chester, we prefer the evidence of Mr. Groves
and Sir Stafford. We see no reason to doubt the authenticity of the
letter. It was admitted in evidence before the Commission after Mr.
Groves had identified it, but it was not made available to the Commission
through the agency of any person giving evidence before it. Moreover,
Mr. Groves would have had little to gain by falsely admitting to writing
a letter which was in great measure embarrassing to both him and Sir
Stafford Sands. There would have been no occasion for the letter if Mr.
Chester's account were true."
The transaction of this momentous piece of business did not, as
Groves' letter indicates, do anything at once to ease the serious shortage
of funds at the disposal of Grand Bahama Development. The sale of the
Lucayan Beach Hotel was in consequence decided upon, and it was this
decision which, as will be seen, brought C. P. Morgan eventually on to
the scene. No doubt by this time Groves and Chester were also aware
that Grand Bahama Development was committed to pay very substantial
fees to "consultants" such as Sir Stafford Sands and other members of
the Executive Council, although it does not appear that they had thus
far been forewarned of the amount of Sands' fee for obtaining the certifi-
cate of exemption, which amounted to $515,000 for certain, and prob-
ably well over $1,000,000 in the view of the Bahamian Commissioners,
whose inability to get documents from the principal actors has left the
matter in doubt.
Sale of Lucayan Beach Hotel to the Manus Brothers
At first it appeared that the highest bid obtainable for the Lucayan
Beach Hotel would be no more than $6,000,000 in United States funds.
No doubt one of the difficulties in disposing of it was the necessity, as
Chester described it, of retaining control over the casino, the first on
Grand Bahama, and now to be included in the hotel precincts and to be
known subsequently as the "Monte Carlo". But the terms of the certifi-
cate of exemption were precise, and the likelihood of another certificate
being issued to the purchasers of the hotel was remote and clearly not
in the long-term interests of Bahamas Amusements Limited. There
were, however, eager purchasers at hand, prepared to offer $6,500,000
in the shape of Allen S. Manus and his brother Cecil. These two stock
promoters, formerly of Toronto, have been referred to before in con-
nection with the affairs of Commodore Business Machines, and Allen
508
Chapter IX
Manus, in particular, as to his appearance in the complicated transaction
of July 10, 1963, involving Morgan, Walton and Wagman, Associated
Canadian Holdings Limited, Five Wheels Limited and Commodore Busi-
ness Machines.1 The result was that W. R. Salter, Q.C., representing
Allen Manus, C. P. Morgan and Jack Tramiel became directors of Five
Wheels, which, by selling 100,000 of its own shares in the first instance
to Commodore Business Machines for $750,000 provided by Aurora
Leasing Corporation, and buying 100,000 shares of Commodore Busi-
ness Machines for $500,000 from Associated Canadian Holdings, was
able to advance to its Bahamian subsidiary company, Five Wheels of
Grand Bahama Limited, the sum of $250,000 for the purpose of con-
structing the marina on Bell Channel Bay. The date of the first meeting
between Allen Manus and C. P. Morgan, which took place in the Royal
York Hotel and was attended by Manus, Morgan, Tramiel and Albert
A. Shelman of Five Wheels, has not been precisely recalled, although
its occurrence was testified to by both Morgan and Tramiel. From the
chronology of other and contingent events known to the Commission it
must have occurred not later than May of 1963, and it had portentous
consequences for both Morgan and Atlantic Acceptance.
Allen Manus did not appear to testify before the Commission,
although he was invited to do so. His intentions in this respect were
long in doubt, since he had expressed his willingness to co-operate with
the Commission to officers of the Securities and Exchange Commission
when they examined him in New York on October 27, 1966. When the
examination was renewed on November 29 he sought the protection of
the Fifth Amendment to the Constitution of the United States, on the
ground that answering any further questions might incriminate him, and
it became clear from subsequent conversations with his Toronto solicitor
that he had no intention of either making a voluntary appearance or of
placing himself within reach of a subpoena. Consequently, relevant por-
tions of his evidence given on oath to the Securities and Exchange Com-
mission2 were read into the record by Mr. Shepherd on February 23,
1967.3 From that given on the first occasion, in so far as his counsel, a
Mr. Milton E. Mermelstein, let him testify at all without interruption,
it appeared that he was born in Toronto on July 20, 1924, attended
school here, although not completing his secondary education, and got
into the stock brokerage business by "marking the boards" in the office
of Bongard & Co. After a period of service in the Royal Canadian Air
Force during the last war he worked successively for Ericson, Hevenor
& Co. and Goodwin, Harris & Co., also members of the Toronto Stock
Exchange, going in 1948 to New York to do similar work for brokerage
firms in that city. In 1950 he returned to Toronto, with his "training
Chapter VIII, pp. 349-56.
'Exhibit 4068.
"Evidence Volume 100.
509
Lucayan Beach and Dalite
accomplished", and became a stock promoter. He was associated with
his brother Cecil Manus in an American company called Manus Cor-
poration dealing in investments, and eventually moved from Toronto to
Nassau in the Bahamas in 1962, at the same time maintaining a house
in Palm Beach, Florida for his estranged wife and their daughter.
According to both Chesler and Manus, the latter was interested in
engaging in some enterprise which would justify his application for
Bahamian residential status. A letter of intent, as the Commission was
informed by James E. Maher, was signed as early as November 1962,
and on May 30, 1963 an agreement was entered into between Grand
Bahama Development Company on the one hand, and Adobe Inter-
national Supply Limited and Freeport International Company Limited
on the other, all incorporated in the Bahama Islands.4 The agreement
recites that the Development Company is constructing a hotel and agrees
to complete it, granting to Adobe International Supply and Freeport
International an option to purchase for a payment of $300,000, which
amount is not refundable if the transaction is not completed. The bal-
ance of the purchase price was to be $6,200,000, or $6,500,000 in all.
The optionees agreed, in the event of the purchase being completed,
to a lease to Bahamas Amusements Limited of the casino area in course
of construction (identified upon a plan which has not come into the
Commission's possession) for ten years at a rental of $600,000 per
annum, and twelve shops in the hotel building at a gross rental of
$150,000 per annum. The transaction was to be completed four days
after the vendor had notified the purchasers that the hotel had been
finished in accordance with an architect's certificate to be submitted;
the Development Company, of course, was obligated to complete the
structure, together with its furnishings, by December 31, 1963, in accord-
ance with its agreement with the Port Authority. The option agreement
is signed for the Development Company by Louis Chesler, and for Adobe
International Supply and Freeport International, each of which con-
tributed $150,000 for the option, by Allen S. Manus. Sir Stafford Sands
was attorney for the vendor, and Peter D. Graham, soon to be Minister of
Labour in the United Bahamian Party government, attorney for the
purchasers. The benefit of the option agreement was later assigned to
the Lucayan Beach Hotel Company Limited, which had been incorpo-
rated on July 26, by an agreement dated November 14, 1963,5 at which
time the Development Company, also a party, agreed to spend an addi-
tional $200,000 on the construction and furnishing of the hotel, and
the purchase price was increased to $6,700,000, all amounts expressed
to be in United States funds. At this time the date of closing was fixed
for December 28. In addition the Development Company undertook to
'Exhibit 2623.7.
BExhibit 2623.8.
510
Chapter IX
furnish to the Hotel Company a licence from the Port Authority
enabling it to operate — a prerequisite for all enterprises in the domain
created by the Hawksbill Creek Act.
Allen Manus Turns to C. P. Morgan
Chesler told the Commission that at this point he had known
Manus for some twenty years, during sixteen or seventeen of which he
had not spoken to him, because Manus had not made good on a com-
mitment made to Chesler when the latter was with Draper, Dobie & Co.
in Toronto. It is all the more remarkable, and is perhaps a measure of
the financial embarrassment of the Grand Bahama Development Com-
pany at this time, that Chesler should have thus bound it to Manus's
corporate creatures for a period of seven months, during which title to
the Lucayan Beach Hotel would be encumbered by their option. Chesler
said that reconciliation between himself and Manus was effected by
Albert A. Shelman of Five Wheels, who had promoted the Royal York
Hotel meeting and introduced Manus to Morgan. In any event, Manus
made light of the problem of finding over $6,000,000 in his conversa-
tions with Chesler, as he did later to Morgan who described him as "a
superior salesman". Since Chesler was a salesman par excellence and
knew his man of old, it is difficult to believe that Manus did not at this
point give assurances that he was in a position to tap the apparently
unlimited resources of Atlantic Acceptance Corporation. Manus, in his
appearance before the Securities and Exchange Commission, in the
course of giving a large amount of evasive and untruthful evidence, was
concerned to minimize the extent and the closeness of his association
v/ith Morgan, although he acknowledged having dealings with com-
panies which Morgan was "supposed to control". Perhaps the explana-
tion is that both Chesler and Manus were successful gamblers and
caution was foreign to them. In any event, it is now necessary to look
briefly at the inter-relation and nature of companies controlled by the
Manus brothers, about which Allen Manus, clearly not given to reticence,
was discouraged from testifying by the solicitous Mermelstein.
For this evidence, and for all that offered in connection with the
involvement of Atlantic Acceptance with the Lucayan Beach venture
in its accounting aspects, except the detailed study of the part played by
Dalite Corporation (Canada) Limited which was given by Mr. Wolf-
man, the Commission was indebted to another member of the firm of
P. S. Ross & Partners, Mr. John M. Burn. His testimony occupied three
days of the Commission's hearings,1 and was accompanied by a chart and
numerous schedules which are essential for the understanding of the
nature and the extent of the Atlantic entanglement. The first one is entitled
Evidence Volumes 52-4.
511
Lucayan Beach and Dalite
"The Manus Group of Companies" and is the chart reproduced opposite.2
The two companies from which all ramifications extend, as far as the
Manus brothers are concerned, are Molly Corporation, incorporated in
the State of Delaware on January 15, 1962 to acquire the assets of an
established concern which manufactured a patented expanding screw, and
Freeport International Company Limited, incorporated in the Bahamas
in March, 1961. All the shares of Molly Corporation were owned by St.
Lawrence Industries Inc., another Delaware corporation controlled by
the Manus brothers, which was to be dissolved as at September 30, 1963
and its assets, consisting of the shares of Molly Corporation, distributed
to its shareholders, including all the directors of Molly Corporation,
namely Peter D. Graham of Nassau, Erwin Lane, David S. Lawi, Cecil
Manus and Milton E. Mermelstein, and of course Allen Manus himself.
One of these shareholders was C. P. Morgan, whose first purchase of the
shares of St. Lawrence Industries was made on August 19, 1963
amounting to 2,500 shares at a price of $10 per share.3 Morgan said
that Allen Manus was not one to let grass grow under his feet, and im-
plied that this purchase was made as a result of over-persuasion by
Manus; but it will become clear that by this time Manus must have dis-
cussed with Morgan in the greatest detail his plans for the financing of
the purchase of the Lucayan Beach Hotel, and that Morgan was being
let in on the ground floor. The chart also illustrates the interest of Molly
Corporation in Five Wheels Limited, of which Morgan became chairman
as a result of the transactions in July of 1963, when the attempt to secure
investment in this company for Commodore Business Machines was
frustrated by the latter's board of directors, and Morgan, Tramiel and
Kapp, through Associated Canadian Holdings, were compelled to step in
and retrieve the commitment. It will be seen, also, that Molly Corpora-
tion had two subsidiaries, one of which, Adobe Brick and Supply Com-
pany, was incorporated in 1963 to take over in April of that year a
group of companies engaged in the marketing of building materials in
the State of Florida, and a Bahamian company called Adobe Inter-
national Supply Limited, incorporated on December 13, 1962, of which
the two Manuses and Erwin Lane were directors and which has already
been referred to as an optionee, jointly with Freeport International, in
the agreement with Grand Bahama Development to provide for the pur-
chase of the Lucayan Beach Hotel.
Before dealing in some detail with the tangled history of the finan-
cing of the Lucayan Beach Hotel Company Limited, which succeeded to
the interest acquired by Adobe International and Freeport International
in the contemplated purchase of the hotel, two preliminary observations
should be made. In the first place the task of the Commission's investi-
gators was greatly hampered by its inability to compel the production of
'Exhibit 2799.
'Exhibit 1917.
512
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Lucayan Beach and Dalite
documents and company records situated in the Bahamas, always
excepting the constating instruments of Bahamian companies on file
with the Registrar General in Nassau, who was kind enough to furnish
certified copies of them to me whenever requested, and without charge.
It will be appreciated that these merely show the names of subscribers to
the memoranda of association who are, generally speaking, solicitors act-
ing for the real incorporators and their clerks. The Commission was
therefore dependent upon what the Clarkson Company Limited, acting
for the Montreal Trust Company as receiver and manager of Atlantic
Acceptance Corporation, could make available from the documents
under its control, and in particular to Mr. J. L. Biddell who made
extracts from the minute books of certain companies at the request of
counsel. For the rest, the Commission's investigators mainly depended
upon accounting documents, prospectuses and correspondence found in
the files of Ontario companies and firms who responded to subpoena, or
volunteered information. The harvest in this respect was abundant, but
there are areas of doubt which will be referred to from time to time.
Although it was freely predicted that the Commission would never be
able to explore, much less understand, the nature and extent of Atlantic's
disastrous losses in the various ventures on Grand Bahama Island to
which Morgan committed its funds, much has come to light. Secondly,
it will be impossible to understand the evidence which must now be
considered without reference at once to certain tables prepared by Mr.
Burn, to be referred to hereafter as occasion requires. They cover the
whole period from the earliest investment of Atlantic funds in 1963 to
the time of Atlantic's default, and, in accordance with practice adopted
hitherto in this report, will be referred to now for further reference as the
account proceeds.
Documents Illustrating the Commitment of Atlantic Funds
The first schedule, entitled "The Atlantic Group and its Debtors —
Loans and Investment Involvement in the Lucayan Venture (not includ-
ing interest accruals on loans) from June 30, 1963 to June 17, 1965", is
Table 45. x It shows the situation, month by month, of loans made to
specific debtors, the names of which stand at the head of this schedule
and which borrowed directly or indirectly from Atlantic Acceptance
Corporation, or subsidiary or associated companies such as Commodore
Sales Acceptance and Aurora Leasing Corporation. The schedule should
be considered in conjunction with the notes appended to it. It will be
noted that the amounts attributed to William L. Walton and Harry
Wagman are alone not in pari materia with the other figures shown, be-
ing originally financed wholly by bank loans. Since the indebtedness was
subsequently assumed by Masco Construction Company Limited, a
'Exhibit 2641.
514
Chapter IX
Morgan company, and paid off through money provided by Atlantic
Acceptance, they are included for the purpose of making the record com-
prehensive. Also to be noted in passing is the reduction of the indebted-
ness of Dalite Corporation (Canada) Limited to Commodore Sales
Acceptance, from a high point of $7,349,548.88 in March of 1965 to
$3,568,073.69 in April, and by the assumption of $3,780,000 by the
Berlin bank, Hugo Oppenheim und Sohn, which again will be examined
in detail. The largest user of Atlantic funds is, as the schedule indicates,
Dalite Corporation, which in turn advanced funds borrowed from Com-
modore Sales Acceptance to its associated company Daylite of Grand
Bahama Limited; the latter also borrowed a comparatively small amount
from Aurora Leasing. Any attempt to show with precision accruals of
interest on the outstanding loans was found by Mr. Burn to be impractic-
able, because of the difficulty in isolating specific loans from other
moneys owed to Atlantic Acceptance; but he estimated the accrued
interest, by July 17, 1965, to be somewhat in excess of $500,000, which
would bring the total debt to or near an aggregate amount of $12,-
000,000.
A substantial portion of the money supplied by Atlantic to these
borrowers was invested in shares of the Lucayan Beach Hotel Company
Limited, and the extent of this is illustrated on a second schedule, in-
serted as Table 462 and entitled "Lucayan Beach Hotel Company Lim-
ited— Capitalization of the Company at Original Issue Dates to June 17,
1965". In the first two columns the date of subscriptions and the names
of the subscribers are shown, the first two being Adobe International
Supply and Freeport International which received shares in respect of
their advance of the option payment made to the Grand Bahama De-
velopment Company; the other columns represent successively the number
of shares issued at the date of the subscription, the equivalent number
after the stock had been split and subsequently re-organized as the
appended note describes, the amounts paid into the company's treasury
and that portion of them derived from the Atlantic group of companies
in Canadian dollars, and from other and unknown sources in U.S.
dollars, with explanatory comment in the right-hand column. The first
page of the table shows this position in relation to equity, and the second
page in relation to long-term debt. It will be seen that in United States
funds the amount of Atlantic money which found its way into the
treasury of the company for shares was $5,320,000, lent to the different
subscribers, and out of 10,000,000 shares issued a total of 3.256,675
were pledged to companies in the Atlantic group at the date of collapse.
The impasse into which Morgan had led Atlantic by June 1965 in this
area of its financial operations, through sheer improvidence and piece-
meal lending, is well illustrated by the fact that, at that time, money de-
rived from it had enabled its borrowers to acquire 79.9^ of the equity
"Exhibit 2642.
515
Lucayan Beach and Dalite
funds in the Lucayan Beach Hotel Company, but the Atlantic group
held as security only 32.6%, or 3,256,675 of the total of 10,000,000
issued shares. But two considerations operated to produce this result,
given the premise that C. P. Morgan exerted absolute control for all
practical purposes over the lending of Atlantic and its associated group
of companies. Morgan was enchanted with the hotel and everything
connected with it, from the time that he first visited Freeport at the invi-
tation of Manus in September 1963; and, as usual, his interest in his own
personal enrichment predominated over his sense of duty to the com-
panies that he served, and the directors and shareholders of which looked
to him for guidance.
The analysis may be carried further by pointing out that the only
other security held by a company associated with Atlantic Acceptance
was the personal guarantee of Allen Manus for the debt of Freeport
International, in the amount of $1,200,000 U.S. funds, payable to Aurora
Leasing, shown on the second page of Table 46 as being secured to
Freeport International by debentures of the Lucayan Beach Hotel Com-
pany. The manner in which the balance of Atlantic's huge investment
of over $11,000,000 was advanced by way of construction loans, first
to Dalite Corporation (Canada) and through it to Daylite of Grand
Bahama, will be dealt with in detail, but in the upshot, as security for
advances of over $11,000,000 through its subsidiary and associated
companies, Atlantic held 32.6% of the issued shares of the Lucayan
Beach Hotel Company and the personal guarantee of Allen Manus for
$1,290,000 in Canadian funds. For the effective value of the former
security, reference to the unaudited balance sheet of Lucayan Beach
Hotel and Development Limited (the name having been changed
in early 1965) as at September 30, 19653 shows that, after deducting a
substantial appraisal surplus, the book value of the stock is represented
by total shareholders' equity of $5,958,445, giving the Atlantic group
a book value for its security of $1,942,308, which is something less than
20% of the aggregate of the loans obtained.
The Molly Corporation Underwriting
Manus's plan to finance the purchase of the Lucayan Beach Hotel
by putting money into the Lucayan Beach Hotel Company was simple
enough in concept. Under the original option agreement between Ches-
ter's Grand Bahama Development Company and Manus's Adobe Inter-
national Supply and Freeport International companies the total purchase
price amounted to $6,500,000 in U.S. funds, of which $300,000 had
been paid on obtaining the option. Manus appears to have been confi-
dent of raising $5,000,000 by way of mortgage through Barclay's Bank
in London, and the balance of $1,500,000 was to be raised by a public
3Exhibit 2625.
516
Chapter IX
offering of 100,000 shares of Molly Corporation at $15.75 per share in
Toronto, 75c4 of which was earmarked for the underwriters. The pros-
pectus1 is dated October 3, 1963, the underwriters were E. T. Lynch
& Co., and L. J. West & Company Limited, now defunct, and these two
firms were each responsible for half of the underwriting. The prospectus
recites the conclusion of four agreements dated August 14, two with
each of these companies in respect of two blocks of shares, each amount-
ing to 50,000. One block of 50,000 was from the treasury, of which
25,000 were offered to each of the underwriters, and the other block of
50,000 was offered on the same terms as issued and outstanding shares
by "a shareholder". All the issued and outstanding common shares of
Molly Corporation, being 692,500 out of 1,000,000 shares authorized,
were owned by St. Lawrence Industries, which, on winding up at Septem-
ber 30, distributed these to its shareholders on the basis of one share of
Molly Corporation for each share held of St. Lawrence. A letter dated
October 1, signed for St. Lawrence by Allen Manus and Erwin Lane,
and addressed to Crown Trust Company in Toronto as transfer agent of
Molly Corporation, contains a list of the shareholders of St. Lawrence
showing 12,500 shares of this company, at the close of business on Sep-
tember 27, as being held by E. T. Lynch & Co. The records of Barrett,
Goodfellow & Co. show that these shares belonged beneficially to C. P.
Morgan, the monetary equivalent being $125,000, and that Morgan was
entitled to 12,500 shares of Molly Corporation.2 The St. Lawrence list
shows also that 405,500 of its shares were owned by Salkeld & Co., a
nominee of the Bankers Trust Company in New York in respect of
which instructions emanated from E. D. Sassoon Banking Company
Limited of Nassau, as a telegram from that company indicates.3 A letter
from Sassoon's to E. T. Lynch & Co. of October 34 further establishes
the fact that the shares held by Salkeld & Co. belonged to Manus's com-
pany, Freeport International, which thus controlled Molly Corporation.
Molly Corporation wholly owned Adobe International which shared
equally with Freeport International in the ownership of all the issued
stock of the Lucayan Beach Hotel Company Limited, except the single
shares of its directors who had been elected on July 30, 1963 in the
persons of Allen S. Manus, Cecil Manus, C. P. Morgan, Erwin Lane
and C. T. Craddock, the first manager of the hotel. It is one of the curio-
sities of Allen Manus's evidence given to the Securities and Exchange
Commission that he denied that Morgan had ever been a director of the
Hotel Company. As a shareholder of Molly Corporation, Morgan was
entitled to the benefit of an offer by Adobe International dated October
31,5 which recites the fact that Adobe International owns 800,000
'Exhibit 176.
"Exhibits 2805-6.
'Exhibit 2801.
'Exhibit 2600.1.
BExhibit 2803.
517
Lucayan Beach and Dalite
shares of the Lucayan Beach Hotel Company Limited at a cost of $1
per share, and on the instruction of Molly Corporation offers shares of
the Hotel Company at cost to Molly shareholders, on the basis of one
share for each share of Molly held. There is no projection of this offer
in the Molly prospectus, although it is disclosed therein that "a wholly-
owned subsidiary" held a one-half interest in the Lucayan Beach Hotel
Company. From this abbreviated account the nature of the control exer-
cised by Allen Manus, provided that the underwriting was successful,
can be discerned, as well as the initial position of C. P. Morgan in an
undertaking which had already stimulated his imagination and was to
enthral it to the end.
The records of the Crown Trust Company, transfer agent for the
Lucayan Beach Hotel Company, as at December 31, 1963, show that on
December 18 Barrett, Goodfellow & Co. were registered as owners of
12,500 shares6 which the firm's ledger account identifies as Morgan's.7
The warrant entitled the holder to purchase these shares from Adobe
International, but for some unexplained reason Morgan got the shares
from a private company of Manus's called Saturn International Limited
to which 32,500 snares were transferred on December 5, 1963. The
records of the transfer agent also show that on December 5 Associated
Canadian Holdings obtained 100,000 shares, and on December 31,
1963, Harry Wagman was the registered owner of 4,000. There were,
in all, at this date 1 ,700,000 shares of the Lucayan Beach Hotel Com-
pany outstanding, with Freeport International still holding 800,000
shares. The method by which Adobe International and Freeport Inter-
national each obtained 800,000 shares requires an explanation which, in
the state of the records available to the Commission, must remain largely
speculative. When the Lucayan Beach Hotel Company acquired the
option to purchase the hotel from Adobe International and Freeport
International in August, it issued 53,567 £.1 shares to Adobe Inter-
national and 53,568 to Freeport International for $300,000 U.S. funds
in all. By special resolution, taken on September 15, the shares were split
four for one, and these companies received 214,272 shares each. It should
be said parenthetically that Table 46 shows this figure as 214,280 shares,
the outstanding incorporators' shares being included for convenience and
to avoid unnecessary elaboration. The position, therefore, after this trans-
action was that the Lucayan Beach Hotel Company had its option, and
had issued shares for its acquisition, but had no money in its treasury.
Accordingly it issued an additional 585,720 five shilling shares to each
of Adobe International and Freeport International for $600,000 U.S.
The total payment of $1,200,000 evidently found its way into the treas-
ury of the Lucayan Beach Hotel Company, as Table 46 indicates. One
might have thought that the subscription of Adobe International was
"Exhibit 2627.1.
'Exhibit 504.
518
Chapter IX
derived from the sale of rights to the shares of the Hotel Company to the
shareholders of Molly Corporation, as indicated in a letter from the assist-
ant manager of the transfer department at Crown Trust Company in
Toronto to E. D. Sassoon Banking Company Limited in Nassau, dated
January 23, 1964.8 Attached to this was a cash statement, dated January
23, 1964, asserting that 656,518 rights had been exercised at $1 by that
date out of a total offered of 755,518, and that the cash on hand from
this transaction, plus deposits made to the account of Adobe Interna-
tional in the Toronto-Dominion Bank, amounting in all to $541,198, and
a direct payment of funds to the company by the Manus brothers of
$125,000 in respect of 125,000 escrowed shares, had yielded $666,198
in the aggregate. However, evidence found in the files of Perlmutter,
Orenstein & Co., Toronto chartered accountants employed by Allen
Manus, consisting of notes and photostatic copies of bank statements at
the Sassoon bank, indicates that Adobe International got its $600,000
by way of borrowing $300,000 from Molly Corporation out of the pro-
ceeds of the underwriting, and receiving $125,000 from Allen and Cecil
Manus in accordance with the Crown Trust statement, an additional
payment of $85,000 from Saturn International, and the balance from an
unknown source. The uncertainty attending this derivation of funds is an
example of the confusion created by inability to cause documents to be
produced in the Bahamas, and the evidence may well be complementary
rather than contradictory. The position of Freeport International is more
definite because it borrowed $250,000 in Canadian funds from Aurora
Leasing, $225,000 in U.S. funds from the Bank of Nova Scotia and
$202,719, also in U.S. funds, from Sassoon's, a loan which was guaran-
teed by C. P. Morgan.
The Molly Corporation underwriting was not a success. Of the
50,000 treasury shares offered, Freeport International had to buy back
19,335 shares for $305,000, advanced by Sassoon's against a deposit by
Molly Corporation in this amount out of the underwriting profits, so that
the fact that it was buying its own shares could be effectively concealed.
As a result, although $750,000 was remitted to Molly Corporation rep-
resenting a sale of 50,000 shares at $15, the net proceeds to the Manus
group were only $445,000 of which $60,000 was provided by Masco
Construction Company Limited and $157,500 by Dallas Holdings Lim-
ited. The manner in which shares were subscribed for, largely by nomi-
nees or by subscribers who eventually did not pay for their shares, was
minutely described by Mr, Burn and illustrated by documents,9 but it
will suffice to summarize the result which is that nearly half of the net
proceeds realized came indirectly from Atlantic Acceptance — and this
must be considered a bare minimum considering the state of the records
— or $217,500 out of $445,000. Of the remaining $227,500 some was
"Exhibit 2623.9.
•Evidence Volume 52, pp. 7120-47; Exhibits 2811, 2637.1, 2813-5, 2624.2 and 2613.2.
519
Lucayan Beach and Dalite
derived by purchases from the underwriters' commission account in the
case of L. J. West & Co., and some possibly from Manus and Morgan
and his associates. Fifty thousand shares offered by Freeport Interna-
tional, and ostensibly subscribed for by a company called Nucleus Devel-
opments, were returned unsold. In the result at least $300,000 of the net
proceeds went into the treasury of the Lucayan Beach Hotel Company
to take down shares for the account of Adobe International. The extent
of the participation of Dallas Holdings must be qualified by saying that,
in consideration of that company buying 10,000 shares of Molly Corpor-
ation and exercising rights to acquire 10,000 shares of the Lucayan
Beach Hotel Company from Adobe International, Allen Manus ad-
vanced to Dallas a third of the total amount required, or $55,833, giving
a promissory note for the total amount of $167,500, and undertaking to
indemnify Dallas against any loss on the transaction.10 The note, which
did not provide for the payment of interest, was to be cancelled after the
completion of the sale. It was expressed to be due on December 28 and
was dated October 21, 1963, the date on which the underwriting was
considered to be complete. Manus's contribution of $55,833 is reflected
in the column illustrating the investment and loans of Dallas Holdings
on Table 45.
Financing of the Lucayan Beach Hotel Company
In view of the difficulty of separating fact from illusion created by
defective records, and Manus's habitual sleight-of-hand in financial mat-
ters, a conspectus of the financing of the Lucayan Beach Hotel with
reference to the information given on Table 46 should be attempted.
Three months before the incorporation of the Hotel Company, or in May
1963, $150,000 had been provided by each of Adobe International and
Freeport International. The Adobe funds came from a short-term loan
in that amount supplied by Molly Corporation's bankers, the Berks
County Trust Company, at a time when this concern was heavily in-
volved in financing the Manus brothers' recent take-over of Molly from
its former owners. It is not known to the Commission where they found
$150,000 for Freeport, but it may be more than coincidence that the first
loans made to Allen Manus by the Trio, on the security of shares of St.
Lawrence Industries and Molly Corporation, were made in May of 1963.
Then, from the Molly Corporation underwriting proceeds of $445,000
in Canadian funds, Berks County Trust was repaid on behalf of Adobe
International $75,000 in U.S. funds, and the Lucayan Beach Hotel Com-
pany $300,000 in U.S. funds, the balance being used in the main to pay
underwriting expenses. The sale of rights to purchase shares of the Hotel
Company by Adobe International to shareholders of Molly Corporation
is the next chronological step, the ostensible result of which, as has been
seen, was to raise $666,198. The largest Molly shareholder was Freeport
"Exhibit 2819.
520
Chapter IX
International, and this company provided $335,000 in U.S. funds to
acquire the rights to which it was entitled by borrowing that amount
from Barclay's Bank in Nassau. The contribution of a further $85,000
by Saturn International has already been noted, and the source from
which Saturn International obtained the money is not known. There are
two further contributions to the Adobe total of $666,198, the first being
an ostensible payment of $125,000 by Allen and Cecil Manus directly
to Barclay's Bank on behalf of Adobe and to the credit of the Hotel
Company, and the balance of $121,198, the source of which cannot be
specifically identified. In the case of the Manus loan of $125,000, neither
the source nor the existence of the funds are certain. Among the docu-
ments obtained from Perlmutter, Orenstein & Co. was a trial balance
for the Hotel Company at January 30, 1964,1 included in which is a
figure in the amount of $125,000 described as "pre-opening and oper-
ating expense". One of the firm's working papers was a receipt from
Adobe International in the amount of $125,000, described as "A. and C.
Manus", which is also reflected in the Crown Trust Company's statement
in relation to the sale of rights to Molly Corporation shares by Adobe
International, with the handwritten notation: "add a direct payment of
funds to Adobe re Cecil Manus and Allen Manus (125,000 escrow
shares)". The evidence, although not conclusive, is strongly persuasive of
the fact that 125,000 of the shares of the Lucayan Beach Hotel Com-
pany belonging to the Manus brothers was charged as a pre-opening
expense to the hotel, and further diminishes the amount of money which
they had at risk.
The offering of rights to shares of the Hotel Company by Adobe
International appears, in short, to have secured very little money outside
that provided by bank loans to the Manus companies and untraceable
funds available to the Manus brothers. Its proceeds were used to pay the
balance of Adobe's subscription for the Hotel Company's shares in the
amount of $300,000, and to advance to it a further $11,000, to deposit
$150,000 with Sassoon's as collateral to a loan to Freeport International,
to repay Molly Corporation $75,000 and Berks County Trust Company
$75,000, so that the short-term loan from the latter of $150,000 was
fully paid, and to keep the balance of $55,198 on deposit with Sassoon's
in Nassau. The Lucayan Beach Hotel Company now had $61 1,000 from
Adobe International, $600,000 of v/hich was the required subscription
for shares issued to it and financed by the sale of rights. Freeport Inter-
national raised $934,000 to pay its $600,000 subscription to the Hotel
Company, and to loan to it a further $334,000. It borrowed $202,719
from Sassoon's, the loan being guaranteed by C. P. Morgan, $250,000 in
Canadian funds (or $231,281 U.S.) from Aurora Leasing Corporation
and $225,000 from the Bank of Nova Scotia, and received an additional
$125,000 the source of which is unknown. Adobe's deposit of $150,000
'Exhibit 2624.3.
521
Lucayan Beach and Dalite
with Sassoon's was evidently used to provide the balance. The Hotel
Company received $600,000 by way of Freeport's subscription for shares
and $334,000 in addition by way of loans, so that the total additional
amount loaned by Freeport and Adobe combined was $345,000. Thus
it was in a position to provide for $125,000 in pre-opening expenses,
genuine or not, to invest $150,000 in the Lucayan Village Company
Limited and pay incidental expenses such as the purchase of a boat for
the use of its president, Allen Manus.
The Lucayan Beach Hotel Company apparently received — certainty
on the subject being impossible — a total of $1,545,000 in U.S. funds of
which the banks provided in excess of $1,000,000, Aurora Leasing
$250,000 in Canadian funds and Dallas Holdings and Masco Construc-
tion Company $217,500, also in Canadian funds. Molly Corporation
now disappears from the history of the undertaking. Its manufacturing
operations were sold to the United States Shoe Machinery Company of
Boston in December 1964, its name changed to Maklaw Corporation
and the company wound up in July 1965. Allen Manus failed in his
efforts to raise the required $5,000,000 by way of mortgage in England
for reasons that can only be guessed at. The news was a blow to C. P.
Morgan who had already committed Atlantic money in the amount of
almost $1,000,000 to additional loans to one of Atlantic's principal
debtors, Dalite Corporation (Canada) Limited, for the construction of
badly-needed prefabricated housing for the employees of the hotel. This
was to consist of 110 so-called "efficiency units" and was already in
course of erection on land some distance from the hotel property, due to
be conveyed to the Lucayan Beach Hotel Company on the closing of its
purchase of the hotel from the Grand Bahama Development Company,
but still owned by the latter. Although the affairs of Dalite Corporation
and its associated company, Daylite of Grand Bahama Limited, require
detailed examination later on, chronology at least requires that Morgan's
reaction should be recorded in his own words. The evidence to be quoted
serves to introduce the next stage of this account, illustrating the progres-
sive involvement of Atlantic Acceptance in the Grand Bahama ventures,
and it will be remembered that it was given some two months before the
evidence of Mr. Burn. Mr. Shepherd's first question summarizes what
had gone before.2
"Q. Could I stop you a moment and make sure I understand this.
Mr. Manus spoke to you sometime during the Summer of 1963 and
suggested that an opportunity existed for Dalite of Canada to supply
employee housing in the Bahamas which would be built by Dalite and
then be purchased by the Lucayan Beach Hotel, and you said that he or
companies controlled by him had a right to purchase the Lucayan Beach
Hotel for $6,800,000 approximately, and he had paid $300,000 in cash
and that he was going to finance the balance by getting a mortgage for
"Evidence Volume 26, pp. 3488-94.
522
Chapter IX
$5,000,000 from Barclay's Bank in England and put up the difference in
cash and that Lucayan Beach Hotel was going to be put in funds to pay
the difference between the purchase price and the mortgage on closing
by selling shares of Lucayan Beach to the public and that a right had
been conferred upon existing holders of the shares of Molly Corporation
to subscribe for shares of Lucayan Beach Hotel at $1.00 per share and
that out of this source as well, I take it, there would be available
sufficient money to pay Dalite Corporation for the employee housing
and that Dalite Corporation then proceeded to purchase lands from
Grand Bahamas Development Company for approximately $450,000
and Dalite Corporation expended a substantial sum in the manufacture
of prefabricated parts for these buildings and also expended money in
bringing the services on to the land, the obligation to pay Lucayan
Beach Hotel — correction, to pay Dalite — for the land and buildings on
completion, laying (sic) with Lucayan Beach Hotel; Lucayan Beach
Hotel had no money or significant amount of money at that time but
that Mr. Manus has assured you that by the date of closing Lucayan
Beach Hotel would have finished public financing and would be in a
position to pay Dalite in cash?
A. That is correct.
Q. Go on from there, please.
A. We are now up to the 10th of December.
Q. 1963?
A. Yes. The Hotel is getting very rapidly ready for its opening. The
staff is arriving and being trained and they are getting all set to open on
New Year's Eve.
About a week before Christmas Mr. Manus has gone over — in the
meantime, Mr. Manus has gone over to England in connection with the
mortgage money and is over there talking to the Barclay people. As a
matter of fact, he even called me from overseas saying that everything
was proceeding according to plan, how were we getting along about the
housing. I said that, as far as I was concerned, everything was going
ahead post-haste.
He came back to Toronto in quite a fluster. He tells me that the
mortgage money in Barclay's has blown up. So I am now in a position
of having advanced a million dollars for employee housing of a hotel
that no longer has a hotel because they no longer have a mortgage. So
I said, T don't know what we are going to do. What is your suggestion?'
He said, 'I am going to fly back immediately to the Island and talk to
the Development Company', which was then operated by Mr. Chesler
as its chief operating officer, Mr. Louis Chesler.
So he went on down to the Island and he called me in a couple of
days and said that he had made a deal with the Grand Bahamas Devel-
opment Company that they would take back a mortgage of $5,000,000
on the security of having a first mortgage on the hotel and that the rent
for the casino and the shops would be pledged to the Grand Bahamas
Development Company until the mortgage was paid.
523
Lucayan Beach and Dalite
I was not aware at this particular time that the mortgage was only for
two years and it was at 8 per cent. It was just in mortgage form. So he
said, 'Now, I have some problems in connection with that mortgage.
Can I come up and see you?' I said, 'You have got some problems.' I
have at that time 110 units of problems sitting there. 'Yes, you better
come up.'
So he came up and the story was that the Grand Bahamas Develop-
ment Company had spent almost nine and a half million dollars on the
hotel which they were very loath to sell for six point eight million
dollars to Mr. Manus, although they did not want to be in the hotel
business and the gambling business too because they had found that the
people in Las Vegas never got paid for any rooms, particularly if the
gamblers lost at the tables.
As a matter of fact, a good proportion of the Las Vegas situation is
that you get the rooms for nothing. So he said he had made a deal with
Mr. Chesler that the purchase price was upped by a million and a quarter
dollars to be paid immediately. This is now the 28th or 29th of Decem-
ber and they were trying to get the hotel opened in three more days.
I said, 'What is going to be the security for this money?' He said that
Freeport International would put up 500,000 shares of Lucayan Beach
Hotel as security, and he personally would guarantee the loan as he felt
it was only going to be temporary until he got his financing going on the
Lucayan Beach Hotel.
Q. Was it 250,000 shares?
A. It could have been. It eventually works out to a million and a
quarter — five for one of the old shares.
Q. Yes.
A. I advanced that money to him that he required plus another two
hundred and fifty thousand dollars through Aurora. I believe the total
loan was $1,500,000, maybe $1,540,000, and it was secured by the
shares of the hotel company, the guarantee of Freeport International,
which financial statements showed a net worth of about $3,000,000 at
that particular time, and the guarantee of Allan Manus personally.
Q. I take it that his shares were not pledged as additional security other
than the 250,000 shares of Freeport International?
A. There was specific pledging of 250,000 shares of Lucayan Beach
and the guarantees of Freeport International and Manus.
Now, that enabled him to get enough money to close the deal with
Chesler, according to what he said. The closing was about the 10th of
January.
Then I get another hurry-up call from him to come down to Nassau.
So I went down to Nassau to E. D. Sassoon Bank . . .
. . . continuing to meet with Mr. Manus and Mr. L'Arbelstier, who was
the Managing Director of the Bank, the balance of the purchase price
was apparently short some $300,000, and Mr. L'Arbelstier wanted to
get a commitment from me that if they called upon me I would invest
$250,000 in equity shares of the company after a 90-day period had
elapsed, if it was deemed necessary by them.
524
Chapter IX
Q. That is by the Sassoon Bank?
A. Yes. I gave this letter on a personal basis to the Bank and this
enabled Mr. Manus to close the deal for the purchase of the hotel."
The financial statement of Freeport International relied upon by
Morgan, showing "a net worth of about $3,000,000", must be that for
October 1, 1963, prepared without audit by Perlmutter, Orenstein & Co.3
While this statement shows share capital in the amount of $3,687,126
and shareholders' deposits of $954,007, the value of these is derived
almost entirely from what is described as a "quoted investment" in 345,-
000 shares of Molly Corporation, entered as $4,534,190.85. The value
assigned is based on a share price of $15, at which Allen Manus was then
attempting to market Molly shares in Toronto with little success. The
Commission's accountants determined that the Manuses' cash investment
in Molly Corporation probably did not exceed $500,000; within a matter
of months this investment was written up on a set of unaudited state-
ments to over four and a half million dollars. That a trained accountant
and head of a substantial lending institution should rely on these, and the
guarantee of the company for which they were provided, to lend it over
$1,500,000 on the tangible security of only a small part of the equity of
the Lucayan Beach Hotel Company which held no more than an option
on a hotel, without any form of mortgage security, is a measure of Mor-
gan's infatuation and must remain a source of wonder.
It should be noted here that Morgan's exceptional memory may
have played him false when he suggests that the sequence of events
moved straight from collapse of the negotiations with Barclay's Bank to
the eventual arrangement with Chesler, since there is a letter to D. S.
Anderson, general manager of the Royal Bank of Canada from W. R.
Salter, Q.C. dated November 21, 19634 which shows that a contem-
porary effort was made to raise the necessary funds from that institution,
on the same basis as had been contemplated before the terms of the
arrangement with the Grand Bahama Development Company had been
changed. It reads as follows:
"Mr. Donald S. Anderson,
General Manager,
The Royal Bank of Canada,
10 King Street East,
Toronto.
re: The Lucayan Beach Hotel Company Limited
Dear Don, —
Further to the information given you when Mr. Powell Morgan, Mr.
Allen Manus and I saw you on Tuesday, we forward the following:
1. Pro forma balance sheet dated November 20th as prepared by
Messrs. Perlmutter, Orenstein, Giddens, Newman & Kofman.
"Exhibit 2610.1.
'Exhibit 2613.2.
525
Lucayan Beach and Dalite
2. Estimated profit and loss statement prepared by Messrs. Horwath &
Horwath dated September 20th, 1963, for the 250 room Lucayan
Beach Hotel. You will observe that there is an estimate of $2,035,-
000 of profit for the hotel apart from rentals of the casino and stores
which will amount to $750,000 per annum.
3. Estimated profit and loss statement prepared by Horwath & Horwath
for the operation of the 150 room motel to be owned by Lucayan
Beach Village Company Limited which will be a wholly-owned sub-
sidiary of The Lucayan Beach Hotel Company Limited. This prop-
erty will include an auditorium with a seating capacity of 800
people, but no revenue from the auditorium has been included in the
projection of income.
In effect, The Lucayan Beach Hotel Company Limited will be in a
position to offer the following as security for the proposed loan:
1. A first mortgage on the hotel itself with approximately 20 acres of
ocean front land on which a sum in excess of $8,500,000 has been
spent.
2. The assignment of the leases on the casino and on the stores in the
hotel carrying an annual rental of $750,000 payable in monthly in-
stalments commencing January 1st, 1964. Payment of the rentals
under the leases will be guaranteed by the Grand Bahama Develop-
ment Company Limited.
3. The deposit as collateral to the mortgage of all of the shares of the
Lucayan Beach Village Company Limited, the wholly-owned sub-
sidiary of The Lucayan Beach Hotel Company Limited, or if desired,
a first mortgage on the Lucayan Beach Village properties.
In our view the security offered is unsurpassed.
With kindest regards.
Your very truly,
SALTER, REILLY, JAMIESON & APPLE
'W. Ralph Salter'
WRS/rl
Ends."
In a handwritten note attached to the letter and dated November 19, it
appears that the amount of mortgage being suggested to the Royal Bank
is $5,000,000 for five years, bearing interest at 8%.5 Chesler told the
Commission that, as the year 1963 wore on, it became apparent to him
that Manus was in difficulty about the mortgage in the course of fre-
quent discussions they had together on the subject, and that he had per-
sonally checked on Manus's assertions that satisfactory commitments
had been made to him in New York.
"Exhibit 2613.3.
526
Chapter IX
Five Wheels of Grand Bahama Limited
Before returning to further consideration of the delayed closing of
the sale of the Lucayan Beach Hotel and its appurtenances, a backward
look must be taken at the development of the Bell Channel Bay area
during the year 1963. The Royal York Hotel meeting of Morgan, Shel-
man, Allen Manus and Tramiel bore fruit in two directions. Shelman of
Five Wheels had plans for a car rental operation on Grand Bahama
where he ultimately established an automobile agency for cars manufac-
tured by General Motors Corporation. How he became interested in the
Lucayan project, or for what reasons, is not clear and perhaps irrelevant,
but since the operation of all businesses in the area of Grand Bahama
reserved to the Port Authority was conditional upon obtaining a licence
from it, it may not be unreasonable to suggest that Chesler, Shelman and
Manus agreed upon a commitment of the resources of Five Wheels to the
construction of the marina in Bell Channel Bay. Two documents de-
scribed as letters of intent, dated August 7 and September 7, 19631, show
that the company's Bahamian subsidiary, Five Wheels of Grand Bahama
Limited, bought part of "Hong Kong Island" from the Grand Bahama
Development Company for £.1, and gave an undertaking to pay $250,-
000 towards the cost of dredging the marshes for the marina, a sum
which, as has been seen heretofore, was obtained from the purchaser's
parent company in the Commodore Business Machines-Associated Cana-
dian Holdings transactions financed by Aurora Leasing in July. The
dredging was to be done by the Freeport Construction Company at a
cost estimated to be somewhat more than $340,000 U.S. funds, and the
Grand Bahama Development Company was to pay all the excess over
$250,000. In addition Five Wheels of Grand Bahama contracted with a
Florida Corporation called Latham Construction Company for the build-
ing of bulkheads, docks and slips for the marina, and borrowed $100,000
U.S. funds from Grand Bahama Development Company to make a down
payment for this work. The total cost, including the dredging to be
performed by Freeport Construction Company, was expected to be
$837, 5 00, 2 but the balance required by the company to complete this
programme was not obtained because both benefit and burden were
taken over by Daylite of Grand Bahama, according to the terms of an
agreement, dated April 9, 1964, between it and the two Five Wheels com-
panies.3 By this agreement Daylite of Grand Bahama bought the marina
project, and lands and water rights connected with it, for $400,000, plus
any sums paid by the Grand Bahama Development Company to the
contractors with respect to the work; settlement was to be effected by
Daylite assuming the $100,000 debt of Five Wheels of Grand Bahama
to the Development Company and a balance of $300,000 to be payable
'Exhibit 2597.1.
2Exhibit 2623.5.
'Exhibit 2623.6.
527
Lucayan Beach and Dalite
in equal instalments in August and December of 1964 and March of
1965. The purchaser also took over the contract with Latham Construc-
tion Company, but conceded to Five Wheels of Grand Bahama the right
to 3% of the gross receipts of the marina for 30 years and the use of six
docking slips for that period, a most valuable concession which was to
cause trouble for the receiver and manager of Atlantic Acceptance later
on. This balance of $300,000 was in fact not paid until the time of the
Atlantic collapse, principally because Five Wheels of Grand Bahama
could not make title to the lands in question, a difficulty which seemed
to bedevil all operations in the Port Authority area, and was alleged to
be deliberately created.
The Problem of Housing Hotel Employees:
Daylite of Grand Bahama Company Limited
It was not long after the signing on May 30, 1963 of the option
agreement which Manus had negotiated with Chesler for the purchase
of the hotel that he discussed with Morgan the problem of housing em-
ployees of the hotel; for provision for them had apparently been omitted
from the plans of the Grand Bahama Development Company, and there
was no place to house them in the prevailing wilderness of Lucaya except
in the hotel itself. Morgan was in a most receptive mood to listen to a
discussion of housing requirements, because large sums of Atlantic money
had been lent to Dalite Corporation to enable it to finance contracts with
the Department of Northern Affairs of Canada to build prefabricated
components of houses to be used in the Arctic, and to fabricate and erect
houses for employees of the International Nickel Company at Thompson,
Manitoba. Morgan lost little time in seizing an opportunity to establish
the virtues of prefabricated housing in an environment where there was
no frost to complicate the problem of preparing foundations, and labour
costs were lower than in the Canadian north. As usual Morgan's interest
was not confined to concern for the repayment of Atlantic loans, since
he had, as will be seen, a substantial personal interest in Dalite Corpor-
ation, demanded from its president, Eugene Last, when Atlantic had
taken over the financing of the company from the chartered banks. Last
was accordingly despatched to the Bahamas to discuss the problem with
Manus and Chesler, and to negotiate an agreement for the purchase of
lands from the Grand Bahama Development Company upon which the
housing could be erected.
Daylite of Grand Bahama Company Limited was incorporated in
the Bahamas on August 26, 19631 to purchase the required land, and to
erect the prefabricated housing units already in the course of manufac-
ture in Dalite Corporation's Toronto plant. At its organizational meeting
Exhibit 4957.
528
Chapter IX
on August 30, 19632 the first directors elected were Eugene Last, Allen
Manus and C. P. Morgan, Last being elected president and treasurer
with Manus and Morgan vice-presidents. Morgan and Manus were to
resign on December 3 and to be replaced by Peter D. Graham and
Nathan Saunders, who had been introduced to the affairs of Dalite Cor-
poration some time before by Morgan, and who was to play a somewhat
ineffectual role as one of several personal representatives of Morgan on
Grand Bahama Island with ill-defined responsibilities. According to
Last, the ownership of the new company was held equally by Manus and
Morgan, and later on all the issued shares, other than single shares held
by the directors, were equally divided between Dalite Corporation and
Associated Canadian Holdings in the amount of 55,000 shares each, so
that Manus's position, if it ever existed, was eliminated. Construction was
evidently begun in September 1963 when the books of account of Daylite
of Grand Bahama were opened;3 none subsequent to November 1963
have ever been found and, in the opinion of officers of the Montreal Trust
Company, did not exist. Negotiations for the purchase of the land upon
which the housing was erected were not completed until after construc-
tion had begun, and were embodied in an agreement between the Grand
Bahama Development Company and Daylite of Grand Bahama.4 It pro-
vided for the purchase of land by Daylite of Grand Bahama and its un-
dertaking to construct twelve single unit dwelling houses and sixty apart-
ments and multiple dwellings by December 31, 1964, and thirteen addi-
tional single units by December 31, 1965; thereafter these are referred
to as 110 efficiency units. While the housing units were being prefabri-
cated in Toronto, at a cost defrayed by loans from Commodore Sales
Acceptance, and shipped to Grand Bahama for construction by Daylite
of Grand Bahama, there was no agreement between the latter and the
Lucayan Beach Hotel Company, or anybody else during 1963, to pay for
what was being built; and by the end of the year Commodore Sales
Acceptance had advanced approximately $816,000 for housing which it
was hoped would be occupied by employees of the hotel. The financial
statement and report of Daylite of Grand Bahama as at March 31, 1964,
audited by Walton, Wagman & Co.,5 show the efficiency units, including
the cost of the land, as being worth $1 ,000.000 in U.S. funds. As Morgan
said, "If the Lucayan Beach Hotel Company had been unable to com-
plete the purchase of the hotel, Commodore Sales Acceptance would
have been in the position of having advanced over $800,000 to build
accommodation for the staff of a hotel owned by the Grand Bahama
Development Company."
'Exhibit 2590.
"Exhibits 2821-2.
'Exhibit 2823.
BExhibit 1078.1.
529
Lucayan Beach and Dalite
The Motel and Convention Hall Contract
But once on the scene in Grand Bahama, Morgan and Last were
not content with the contract for the efficiency units alone. Regardless
of the uncertainty of the hotel company's position Daylite of Grand
Bahama undertook to build a 150-unit motel and a convention hall for
Lucayan Village Company Limited, a subsidiary of the Lucayan Beach
Hotel Company, on a portion of the Hong Kong lands lying west of the
marina property on Bell Channel Bay, acquired, as seen, for £ 1 from
the Development Company in exchange for its undertaking to do so.
Lucayan Village was to reconvey the lands in question if construction
were not commenced within twelve months, and Daylite of Grand Ba-
hama was to be paid for the cost of construction, plus 10% for complet-
ing the whole structure within two months after possession of the site
was given to it. The purchase price was to be paid in three monthly
instalments of $150,000 in October, November and December 1963. and
the balance extended over seven years in monthly payments with interest
at the rate of 10% per annum. The agreement,1 dated September 20,
1963, was executed for Lucayan Village by Allen Manus and for Daylite
of Grand Bahama by C. P. Morgan, and was subsequently amended by
one dated December 5, 19632 to establish the purchase price, not at cost
plus 10% but at $1,350,000, payable $150,000 down and the balance
in instalments based on progress certificates. A further amendment was
made on April 22, 1964, extending the date of completion to December
5 of that year, and deleting the requirement for the immediate payment
of this sum. It may be noted that, at the time this agreement was entered
into, Lucayan Village Company had no assets and was a subsidiary of a
company which had no hotel, nor the funds to enable it to complete the
purchase. The Lucayan Beach Hotel Company had increased its com-
mitment from the $6,200,000 necessary to acquire the hotel by an addi-
tional $1,350,000 for the construction of the motel, including a down
payment of $150,000 which was not in fact made.
The problem of paying for the motel and convention hall led to a
most involved transaction which can best be introduced by referring to
an agreement between the Lucayan Beach Hotel Company and Associ-
ated Canadian Holdings, dated December 5, 1963.3 It provided that
Associated Canadian Holdings would subscribe for 100,000 treasury
shares of the Hotel Company for a price of $1,200,000 in Canadian
funds, in consideration for which the latter agreed to deposit the money
in a bank designated as British Mortgage & Trust Company, "with in-
structions to the said bank that the said sum shall be earmarked solely
for the purpose of making payments to Daylite of Grand Bahamas Com-
pany Limited under architect's progress certificates issued pursuant to a
Exhibit 2610.5.
'Exhibit 2610.6.
'Exhibit 2622 (w).
530
Chapter IX
contract bearing even date herewith made between the Lucayan Village
Company Limited as Owner of the First Part and Daylite of Grand
Bahamas Company Limited as Contractor of the Second Part. Lucayan
agrees that no payment shall be made out of the said account except to
Daylite of Grand Bahamas Company Limited or with the consent of
Associated". Then C. P. Morgan, in one of his characteristic handwritten
letters addressed to W. P. Gregory on December 12, wrote as follows:4
"Mr. W. P. Gregory, Q.C.
Managing Director,
British Mortgage & Trust Co.
As discussed with you verbally on behalf of Associated Canadian
Holdings Limited I would like to apply for a short term loan of $1,200,-
000 Canadian. Suggested term to Mar 31, 1964 at 7%.
An offering of Lucayan Beach Hotel Company Limited of Freeport
Grand Bahama (who rent the casino to the E. P. Taylor-Chesler-Grand
Bahama Development Corp. at an annual rent of 750,000.00) is com-
ing to market in January at 12.75 per share.
Associated have arranged with Lucayan Beach Hotel Company to give
you a term deposit of $1,200,000 at 4% to be held by you, in addition
to the 100,000 shares of stock, as guarantee of repayment of your loan.
This certificate of deposit will be hypothecated to B.M. & T.
Could we have an early answer.
C. P. Morgan"
There seems to be no excuse for the reference to E. P. Taylor, the well-
known Canadian financier, now a resident of the Bahama Islands, as an
associate of Chesler's in the Grand Bahama Development Company, and
the immediate effect of this falsehood was its repetition in the minutes
of British Mortgage & Trust Company dated December 17, 19635 in the
following terms:
"The Managing Director advised that Mr. Powell Morgan has made
inquiries of our interest in two short loans
$1,200,000. is required by Lucayan Holding Limited. This Com-
pany controls property in the Bahamas which is leased to Canadian
Industrialists (one of which is E. P. Taylor) at a rental of $750,000
per annum. The funds would be used to purchase a deposit receipt at
4% maturing March 31, 1964. Associated Canadian Holdings, a Com-
pany related to Lucayan will borrow on the security of our deposit
receipt plus shares of Lucayan Holdings. There will, therefore, be no
actual cash change hands but we will pay 4% on $1,200,000. and
receive 7% on the same amount.
The Committee approved both loans and left the details for the
Managing Director to complete.*"
♦Exhibit 2826.
"Exhibit 109.
531
Lucayan Beach and Dalite
The agreement whereby Associated Canadian Holdings agreed to sub-
scribe for the stock of the Lucayan Beach Hotel Company specifies, in
the direction to British Mortgage & Trust attached to it as Schedule A,
that the money held in escrow with the trust company be available to
Daylite of Grand Bahama, but Morgan's letter, and the British Mortgage
minutes authorizing the loan, make it clear that the money being
advanced to the Hotel Company was in fact to be held by British Mort-
gage as security for a loan by it to Associated Canadian Holdings.
Grand Bahama Development Company was led to believe that
this large sum of $1,200,000 would remain on deposit to pay all claims
so that the motel might be paid for when built, and refers to it explicitly
in a letter dated December 21, 1963, to the Lucayan Beach Hotel Com-
pany which should be quoted, as it also sets out the basis upon which the
Hotel Company was to be relieved of its need to find $6,200,000 to com-
plete the purchase of the hotel. This letter was signed for the Develop-
ment Company by Louis Chesler and endorsed as "agreed to" by Allen
Manus for both the Hotel Company, the Lucayan Village Company and
in his personal capacity. A space for the signature of C. Powell Morgan,
in the copy of the letter in evidence and acquired from the files of Salter,
Reilly, Jamieson & Apple, is left blank. The relevant extracts are as
follows:6
"We refer to the various agreements with respect to The Lucayan
Beach Hotel (the Hotel) between your company and the undersigned
pursuant to which you are obligated to pay us on December 28, 1963
the sum of $6,200,000 (U.S.) against which payment essentially we are
obligated to transfer title to the Hotel to you. You have advised us that
you will be unable to close since you will not have cash available.
Subject to the drawing of appropriate documentation and the approval
of legality by Bahamian counsel, it is your and our intention to modify
the agreements between us along the following lines, so you will not
default under your contract:
1. The Lucayan Beach Hotel Company, Ltd. (the Hotel Company)
will on December 28, 1963 pay to The Grand Bahama Development
Company Limited (the Development Company) $1,200,000 (U.S.) The
balance of the purchase price due will be increased to $5,800,000 (U.S.)
2. The Hotel Company will agree to pay to the Development Com-
pany on January 28, 1964 the amount of all extras which were required
to be paid pursuant to the existing contracts, such sum to be agreed upon
between Mr. James E. Maher and Mr. Allen S. Manus and if they are
unable to agree by January 21, 1964 as to such amount, an amount for
such extras to be fixed by Stafford L. Sands, Esq. on or prior to January
27, 1964.
3. On December 28, 1963 there are to be delivered to an escrow
•Exhibit 2613.4.
532
Chapter IX
ent, satisfactory to the Hotel Company and the Development Com-
pany, the following:
. . . . (e) All of the issued and outstanding shares (the Motel
Shares) of Lucayan Beach Village Company Limited, a Bahamian
corporation (the Motel Company) presently constructing a 150-room
motel and an 800-seat convention hall on approximately a 6V2 acre
area, formerly known as Hong Kong West in Lucaya. Freeport,
Grand Bahama (the Motel) together with an irrevocable direction to
the person with whom there is presently escrowed $1,200,000 (Cana-
dian) to expend such sum for the completion, furnishing and equip-
ment of such Motel and convention hall."
Again there is a letter dated April 16, !964 from Associated Cana-
dian Holdings a copy of which was found in C. P. Morgan's files, pre-
pared for the signature of Jack Tramiel as president, addressed to the
Grand Bahama Development Company at Coral Gables in Florida, in
the following terms:7
"Gentlemen:
This is to advise you that the deposit receipt with the British Mortgage
and Trust Company in the name of Lucayan Beach Hotel Company
Limited (photocopy attached) is irrevocably committed for the construc-
tion of a 150 room motel and other services on the IV2 acre site near
the marina opposite the Lucayan Beach Hotel in Lucaya. Grand Bahama.
It will be released by us upon engineers certificates, in whole or in
part to Daylite Grand Bahama Limited, the contractor, and under no
circumstances will it be paid over to the hotel company for general cor-
porate purposes.
ASSOCIATED CANADIAN HOLDINGS LIMITED
Jack Tramiel
President"
British Mortgage & Trust Finances the Subscription of
Associated Canadian Holdings
A loan of $1,200,000 was in fact made to Associated Canadian
Holdings by British Mortgage & Trust Company, and the subscription of
the former for shares of the Lucayan Beach Hotel Company was paid
by a cheque drawn in its favour, signed for Associated Canadian Hold-
ings by Tramiel and Wagman on January 12. 1904 for this amount.1
The ledger card at British Mortgage & Trust with respect to the Hotel
Company's account No. 10001 is marked with the telephone numbers
of Morgan and Wagman and the notation: "All entries are to be tiled
in safe. All entries to be referred to Ci. Wilson".- G. R. C. Wilson was
'Exhibit 2828.
"Exhibit 2829.
-Exhibit 2830.
533
Lucayan Beach and Dalite
the trust company's manager at its premises at 2200 Yonge Street in
Toronto where the deposit was made on January 15. The ledger card
shows that a withdrawal was made the same day with an additional nota-
tion to "leave open". The deposit was made by Associated Canadian
Holdings from the loan arranged with British Mortgage & Trust, and the
withdrawal effected by a cheque dated December 20, 1963, drawn in its
favour by the Lucayan Beach Hotel Company and signed by A. S.
Manus and Peter D. Graham, in the amount of $1,200,000 in Canadian
funds.3 British Mortgage & Trust issued a deposit receipt, No. 4216, to
the Hotel Company for the same amount dated January 16, 1964.4 This
deposit receipt never left the trust company, being held as security as
indicated by the fact that the depositor never signed the form acknowl-
edging receipt of the money for which the receipt was issued. The deposit
receipt was assigned by the Lucayan Beach Hotel Company, in a docu-
ment also executed by Manus and Graham and dated December 23,
1963, to British Mortgage & Trust "as collateral only to a loan made by
British Mortgage & Trust Company to Associated Canadian Holdings
Limited in the amount of $1,200,000 (Canadian funds) due March 31,
1964"."' Finally there was a note to British Mortgage & Trust, signed for
Associated Canadian Holdings by Tramiel and Wagman, for $1,200,000
due March 31, 1964, and bearing interest at 7% ;6 but the loan was not
paid on the due date and a second deposit receipt was issued, numbered
6928, in favour of the Lucayan Beach Hotel Company in the amount of
$1,210,126.10,7 which also remained in the possession of the trust com-
pany. The additional amount evidenced by the second receipt represents
accrued interest at 4%.
There is nothing in the minutes of meetings of directors of the
Lucayan Beach Hotel Company authorizing Manus and Graham to deal
thus with the deposit receipt. Indeed, on the occasion of the public offer-
ing to which Morgan referred the company issued a prospectus dated
May 29, 1964,8 signed by Allen and Cecil Manus. The promoter was
shown as Freeport International Company Limited for which Allen
Manus also signed. Note 1 to the consolidated balance sheet refers to a
deposit of $1,112,916 U.S. and continues: "The wholly-owned subsid-
iary has entered into an agreement for the construction of a motel and
convention hall to cost approximately (Can. $1,350,000) $1,250,000.
This deposit has been escrowed for this purpose". Only a week before,
G. R. C. Wilson, from his Yonge Street branch, had written to his man-
aging director in Stratford enclosing a copy of a letter which has not
'Exhibit 2831.
'Exhibit 2832.
'Exhibit 2834.
•Exhibit 2835.
"Exhibit 2836.
8Exhibit 181.
534
Chapter IX
been found "from the attorney for the Grand Bahama Development
Company Limited", evidently asking for the transfer of the proceeds of
deposit receipt No. 4216 for $1,200,000, held in the name of the Lu-
cayan Beach Hotel Company Limited, to the Royal Bank of Canada. I
say "evidently" because the files of British Mortgage & Trust Company
show that two memoranda, with the same date and asking for the same
instructions as to the propriety of this, were prepared for Wilson's signa-
ture. One of them, which he did not sign but which he was apparently
unwilling to destroy, refers to the request for transfer to the Royal Bank
of Canada, but the other refers only to the copy of the letter enclosed
and concludes, "I would appreciate your advices as to whether I may
comply with the requests in the letter, provided that I have the written
consent of Associated Canadian Holdings Limited in accordance with
Schedule A of the agreement referred to". This memorandum was en-
dorsed in W. P. Gregory's handwriting, "Get in touch with Powell Mor-
gan and be guided by him — and John Gordon. Remember that we have
a loan to Powell's associates for $1,200,000. W.P.G." Adjacent to these
memoranda in the trust company's files is a letter dated March 26 from
Wilson to C. Powell Morgan, marked as a copy and unsigned, but in
appearance at least an original document.9
"We enclose a photostat of a letter received from the Attorney for the
Grand Bahama Development Company Limited concerning the special
deposit receipt No. 4216 for $1,200,000. in the name of The Lucayan
Beach Hotel Company Limited.
As you know, this deposit receipt is lodged as collateral security
against the loan for $1,200,000. in the name of Associated Canadian
Holdings Limited, which is due March 31st, 1964.
It would appear that the request of the Attorney is not in accordance
with Schedule "A" of the agreement between Lucayan Beach Hotel
Company Limited and Associated Canadian Holdings Limited.
We would appreciate your advice as to the course of action we should
take with regard to the enclosed correspondence so that we may advise
the Attorney for the Grand Bahama Development Company Limited."
It will be noted that here again there is no mention of the specific
nature of the request, so that there appears to have been an attempt
made to purge the file of both of the letters sent on behalf of the Grand
Bahama Development Company and any reference to its contents which
was frustrated by Wilson, either inadvertently or by design, in the pres-
ervation of his first and unsigned memorandum to Gregory. But if there
is any doubt as to the deliberation with which the assignment of the
deposit receipt as security for a loan of $1,200,000 to Associated Cana-
dian Holdings was concealed by British Mortgage & Trust, as guided by
C. P. Morgan, it is dispelled by its equivocal and misleading answer to
"Exhibit 2837.
535
Lucayan Beach and Dalite
a request by Price, Waterhouse & Co., auditors of the financial state-
ment contained in the prospectus of the Lucayan Beach Hotel Company,
v/hen this firm inquired about the nature of the deposit in a letter to the
trust company dated February 10, 1964.10 This letter, which emanates
from the Nassau office of Price, Waterhouse & Co., asks for the com-
pletion of a certificate containing details of interest rate, interest at Janu-
ary 31, 1964 and the period of the deposit. Attached to it in the British
Mortgage & Trust file is found a duplicate of the auditor's form, filled in
to the extent of revealing that the deposit is $1,200,000, bears interest
at 4% and that accrued interest at January 31, is $2,104.10. All the
succeeding paragraphs in which information is required are marked
"nil" except paragraph 7, requiring "particulars of any amount for which
the above customer is contingently liable to the bank", and paragraph 8
which asks for "additional information". These are left blank, and para-
graph 3, marked "nil", asks for particulars of any securities or other
collateral held in respect of loans, notes payable and overdrafts. If any
one of paragraphs 3, 7 and 8 had been properly completed it would have
disclosed that the deposit receipt was not free of lien. The atmosphere
of deliberation thickens on discovery of a carbon copy of a letter dated
February 22 to Price, Waterhouse & Co. from Wilson, apologizing for
the delay in returning this certificate. On January 16, and again on April
3, 1964, British Mortgage & Trust advised the Lucayan Beach Hotel
Company Limited in identical terms that it was holding the deposit re-
ceipt as collateral security and "in accordance with Schedule A of the
agreement between the Lucayan Beach Hotel Company and Associated
Canadian Holdings".11 Schedule A was the letter of deposit and instruc-
tion given by the parties to British Mortgage & Trust and concluding "no
payments out of the said account shall be made except to Daylite of
Grand Bahama Company Limited except with the written consent of
Associated Canadian Holdings Limited."
Final Terms of Sale of Lucayan Beach Hotel:
Opening and Management Problems
As already seen, provision had been made in the Grand Bahama
Development Company's letter of December 21, 1963, subscribed to by
the Lucayan Beach Hotel Company,1 for raising the purchase price of the
hotel from $6,500,000 to $7,000,000, both amounts expressed in U.S.
funds. The hotel was not in fact sold for that price. The principal agree-
ment to be considered was found in a bound volume prepared by Salter,
Reilly, Jamieson & Apple2 in which are a number of such documents,
this being the second under a tab marked "(b)" and conveniently refer-
10Exhibit 2838.
"Exhibits 2840-1.
Exhibit 2613.4.
'Exhibit 2621.
536
Chapter IX
red to in evidence as Exhibit 2621(b). It is dated January 18, 1964
and provided for the sale of the hotel for $7,693,462 U.S. funds of
which $5,000,000 was to be secured by a mortgage from the Hotel
Company to the Development Company as vendor, bearing interest at
8% per annum and due in two years' time. The mortgage itself3 pro-
vides additional security by way of a covenant of the mortgagor that
when the Development Company conveyed those lands which had been
set aside for the erection of the motel to Lucayan Village Company the
Hotel Company would mortgage them back, presumably by instructing
its subsidiary to do so. It is apparent, therefore, that on January 1 8 Lu-
cayan Village Company still did not have a conveyance of the lands on
which Daylite of Grand Bahama had been building the motel with the
money supplied by Atlantic Acceptance. Here was further proof, if proof
were needed, that no one was really looking after Atlantic's interest, and
Peter D. Graham, who sat on the boards of both the Lucayan Beach
Hotel Company and Daylite of Grand Bahama was evidently prepared
to accept any conflict which arose between Morgan and Manus as a
customary hazard of his occupation as an attorney. There is a further
agreement of the same date in connection with the motel4 between the
Hotel Company and the Development Company, providing for the com-
pletion of the motel in accordance with new plans which are referred to
as having been the subject of agreement, although the parties to such an
agreement are not specifically identified, within six months of the date
of conveyance of the land upon which it was being built. In the mean-
time the shares of Lucayan Village Company should be lodged with the
Grand Bahama Development Company in condition for transfer as
security, and in the event of default the Hotel Company would surrender
its licence to operate a hotel to the Port Authority. The construction of
the motel within the required time was critical, and upon it, therefore,
rested the ability of the Lucayan Beach Hotel Company to operate its
principal asset. Finally the arrangement to lease to Bahamas Amuse-
ments Limited the gambling casino and the twelve stores in the hotel
for an annual rental of $750,000 is embodied in an agreement between
the same parties, also dated January 18,5 the rentals to be applied against
the principal amount owing on the mortgage. This at last was the way
in which the transaction was carried out and, after deduction of the
$300,000 paid for the option in the previous year, cash was required to
close in the amount of $2,393,462.
The Lucayan Beach Hotel Company now needed a further $1,-
200,000 over and above what had been received from Adobe Inter-
national and Freeport International. This was obtained from Aurora
'Exhibit 2621 (e).
4Exhibit 2621 (f).
"Exhibit 2621 (k).
537
Lucayan Beach and Dalite
Leasing Corporation, as the loan register of Aurora Leasing6 indicates,
and as Morgan described in the excerpt of his evidence already quoted.
On January 2, 1964 Aurora bought a bank draft from the Canadian
Imperial Bank of Commerce for $250,000 and delivered a certified
cheque to the Royal Bank of Canada in Toronto for $1,290,000, for a
total of $1,540,000 in Canadian funds, recording this amount as a loan
to Freeport International. Chesler's recollection is that Morgan brought
down a cheque for the whole amount himself, and that he, Chesler, did
his best to dissuade Morgan from making this investment. No doubt it
was this kind of intervention on Chesler's part which induced Allen
Manus to tell the Securities and Exchange Commission officers that
Chesler was the "principal saboteur" in the island of Grand Bahama,
but it is possible to conclude that Chesler was anxious for the reputation
of the Lucayan venture not to be compromised by Manus's blandish-
ments, and, as events will show, Morgan had every reason to regret his
impulsiveness on this occasion. Moreover Chesler was well aware that
Manus was getting a bargain at little risk to himself, if we are to accept
the evidence provided by a letter from the Grand Bahama Development
Company to Eugene Last at Daylite of Grand Bahama,7 setting out the
cost of the hotel and the marina in the following terms:
"Land and improvements to land $ 143,488.00
Construction and pre-operating costs
(including furniture, fixtures and
equipment) 8,647,368.19
Estimated value of the Marina area of
20 acres and water rights 374,759.00"
Without access to the books of the Grand Bahama Development Com-
pany it is not possible to assess the validity of these figures, but they
indicate that the Development Company was losing approximately
$1,100,000 in U.S. funds on the sale. Doubtless all was to be repaired
by the profits from gambling for which Bahamas Amusements Limited
was accountable to the Development Company, and Chesler's knowledge
of the difficulties encountered in Las Vegas was, as Morgan suggested,
sufficient to deter him from trying to operate a gambling concession in
conjunction with a hotel. In fact the $5,000,000 mortgage which the
Development Company received together with the cash balance was to
prove a valuable source of credit from the Royal Bank of Canada.
Aurora Leasing received no interest on its loan to Freeport Inter-
national, although the rate was originally expressed as being \XA% per
month, subsequently reduced to 14% per annum. After the collapse of
Atlantic on July 31, 1965 unpaid interest on the loan amounted to
"Exhibit 929.
"Exhibit 2844.
538
Chapter IX
$339,645 on a simple interest basis. Aurora's only security was 250,000
shares of the Lucayan Beach Hotel Company, which were pledged, and
the personal guarantee of the loan by Manus annexed to Freeport Inter-
national's note.8
Chesler recalled that the amount of money paid to the Grand
Bahama Development Company by the Lucayan Beach Hotel Company
on closing the hotel transaction in January was roughly $2,800,000. He
said that he flew from Freeport with Mr. and Mrs. Morgan, presumably
to Nassau, to meet Manus. Morgan's evidence was to the effect that
when he arrived in Nassau he found that Manus was still short some
$300,000 of the required balance to close, and that he raised this money,
in part at least, by taking over a loan from the E. D. Sassoon Banking
Company to Freeport International and acquiring from the latter at one
dollar per share 250,000 shares of the Lucayan Beach Hotel Company
pledged with the bank as security. Morgan's commitment to do this was
given on the spot to enable closing to proceed, but he was given ninety
days to complete the purchase of the shares which were lodged with the
Sassoon bank, and against which by July 1965 he had paid some $25,000
and accumulated interest. He was proud of the part he had played in
this transaction because these shares, as a result of a reorganization of
the capital structure of the Hotel Company and further splits, had be-
come 1,250,000 when he turned them over to the Montreal Trust Com-
pany after the collapse; this, he said, put the receiver and manager of
Atlantic in a strong position to acquire the interest of the Manus brothers
and take over virtually complete ownership of the company. He had
less reason to be proud of the way in which the Manus brothers dealt
with him in recompense for this providential infusion of Atlantic money
into their staggering hotel enterprise. Freeport International Company.
to which Aurora Leasing had advanced $1,540,000, in turn lent $1,-
290,000 of this amount, or $1,200,000 in U.S. funds, to the Lucayan
Beach Hotel Company, taking back a debenture securing that amount
with interest at 8%, the debenture being signed by Allen S. Manus as
president. The minutes of meetings of the board of directors of the Hotel
Company for January 8, 19649 show that the issuing of this debenture
was authorized by a meeting said to have been attended by Allen Manus.
Cecil Manus and Alice L. Albury, the assistant secretary. The debenture
was payable on demand and was not assigned by Freeport International
to Aurora Leasing, as might have been expected, but to Cecil Manus on
February 24, without any apparent consideration."' Thus Freeport Inter-
national obtained a senior security and ranked ahead of Aurora Leasing
in respect to priority of claims. Morgan said that he did not hear about
this signal example of bad faith and double-dealing until he saw the first
"Exhibit 2842.
"Exhibit 2567.
'"Exhibit 2621 (p) ami (q).
539
Lucayan Beach and Dalite
financial statement of the Lucayan Beach Hotel Company, but Chesler
testified that Morgan's first realization of the position was after a dispute
with Manus in the hotel, in the course of which Manus blurted out the
secret, and said that he could wipe out the shareholders' equity. Morgan
confessed that he was absolutely horrified, as indeed he must have been
if he had not realized until that moment the kind of people he was deal-
ing with in the Manus brothers, who had undertaken, according to him,
to have Freeport International lend the money to the Hotel Company
without security. If Morgan had protected Atlantic Acceptance by
securing the services of independent solicitors, this transaction, which
was to cost Atlantic noteholders dear when the Montreal Trust Company
made its final settlement with the Manus brothers, could not conceivably
have happened.
Manus had effectively secured his position in the affairs of the hotel
v/here he proceeded to live in luxury during the early and disastrous
period of its operations. The first manager, Charles T. Craddock, who
had the support of Chesler, also a resident of the hotel, was an experi-
enced American practitioner in the field. During his brief stay he had to
wrestle with the problem of housing his employees on the ground floor
of the hotel. But the opening ceremonies occurred on New Year's Eve
of 1963 with great eclat, and Craddock's arrangements for these were
highly praised by Chesler. Thereafter Allen Manus came to regard
Craddock as an agent of Chesler's and was to let him go within three
months, after which management was undertaken by the Dinkier Man-
agement Corporation of New York, according to an agreement dated
March 17, 1964.11 From a financial statement for the period January
1 to April 30, 1964, made without audit apparently by Perlmutter,
Orenstein & Co., it appears that the new hotel lost $157,372 in U.S.
funds. Offsetting this operating loss was the casino and store rental in
the amount of $250,000, and after deduction of interest on loans and
insurance premiums the final loss before depreciation of assets valued at
just under $8,000,000 is $79,437. Another financial statement for the
eight-month period from February 1 to September 30, 1964 shows an
operating loss of $529,573; after application of revenue from casino and
store rentals and deduction of financial, directors' and other costs, the
net result before depreciation is a loss of $461,282. This statement does
not include any loss occurring in the month of January. In the meantime
Daylite of Grand Bahama had more than fulfilled the requirements of
its agreement with the Grand Bahama Development Company in the
construction of the efficiency units, which were ready to house the
employees of the hotel in March. As might be expected, the Lucayan
Beach Hotel Company was unable to pay for them, having by this time
no money, and no expectation of getting any except from the contem-
"Exhibit 2622 (y).
540
Chapter IX
plated public offering of ordinary shares. Two separate leases dated
March 27, 1964:- provide for the rental of the units for an aggregate
of $990,000, payable over sixty monthly instalments, which amounted
to $198,000 per year at the rate of $16,500 per month, subject to an
adjustment in favour of the tenant for maintenance. All the money to
build these efficiency units had been supplied by Commodore Sales
Acceptance through Dalite Corporation, and the manner in which the
Hotel Company paid the rent without paying any money and its effect
upon the position of Commodore Sales Acceptance, which of course was
detrimental, will be dealt with when the affairs of Masco Construction
Company come to be considered.
It has been seen how Daylite of Grand Bahama had extended its
interests and added to its responsibilities by purchasing the undertaking
of Five Wheels of Grand Bahama to construct the marina and docks on
Hong Kong Island at about this time, so that it was now committed to
build the 150-room motel, the convention hall (which was never in fact
built) and the marina and docks, all situated on the north side of Bell
Channel Bay and conveniently contiguous. Daylite of Grand Bahama
was, however, to confer an additional benefit on the Lucayan Beach
Hotel Company by coming to its rescue with the Grand Bahama Develop-
ment Company over the amount of payment for extras in the construc-
tion of the hotel which was, in the original purchase agreement, set to
be decided by Sir Stafford Sands in case the parties failed to agree. In the
event, the Development Company agreed to take $250,000 in U.S. funds,
paid for by a promissory note for that amount made by Daylite of
Grand Bahama. This transaction becomes unusual when it appears that
Daylite of Grand Bahama assumed this obligation without any con-
sideration, and indeed made a gift of the money to the Hotel Company,
the general ledger of which shows a credit of $250,000 to its "capital
and contributed surplus account", the explanation reading "settlement of
G. B. Dev. Co. a/c by Daylite of G.B." It thus obtained an increase
of surplus by $250,000 without any expenditure of money.13 That this
was a gift at the expense of Daylite of Grand Bahama, and of course
ultimately at the expense of Atlantic Acceptance, was made abundantly
clear by the fact that Eugene Last, on behalf of his company, signed a
release in favour of the Hotel Company11 absolving it from all claims in
respect of the $250,000 payment made on its behalf. The only reason-
able explanation is that Daylite of Grand Bahama made this gift, the
first of three, quite apart from advances which were treated as receivable
for the next fifteen month period, to enhance the value of the stock of the
Lucayan Beach Hotel Company.
"Exhibit 2622 (s).
"Exhibit 2848.
"Exhibit 2623.10.
541
Lucayan Beach and Dalite
Public Offering of the Lucayan Beach Hotel Company
The prospectus which accompanied the public offering of ordinary
shares of the Lucayan Beach Hotel Company Limited has already been
referred to.1 It is dated May 29, 1964 and offered 300,000 ordinary
shares with a par value of half-a-crown, of which 100,000 were to be
issued from the treasury and 200,000 outstanding shares offered by a
"shareholder" through the sole agency of Barrett, Goodfellow & Co.
at $6.50 per share. The shareholder was Associated Canadian Hold-
ings, and its 200,000 shares represented the 100,000 deposited with
British Mortgage & Trust as security for the loan of $1,200,000; these
had been split two for one pursuant to a special regulation of April 2,
1964. The company's board of directors had undergone some changes:
Peter D. Graham had resigned on December 31, 1963, and Charles T.
Craddock on May 27, 1964. Most significant was the resignation of C.
Powell Morgan, recorded on May 22, so that his name did not appear in
paragraph 4 of the prospectus where the directors are given as Cecil
Manus, Allen Samuel Manus, Erwin Lane and Alexis Obolensky, Cecil
Manus being shown as chairman of the board and Allen Manus as presi-
dent. The minutes of company meetings in the possession of the Commis-
sion indicate that on May 26 two other directors, as well as Obolensky,
replaced those who had resigned in the persons of Milton E. Mermelstein
and S. T. Lesser. These names do not appear in the statutory informa-
tion section of the prospectus. The nature of the agreement between the
company and Associated Canadian Holdings with Barrett, Goodfellow
& Co. was set out in paragraph 12, in which it was said that the net pro-
ceeds for the sale of shares would be $6 per share sold, and that the only
persons having a greater than 10% interest in Associated Canadian
Holdings were Manfred Kapp, Mildred Lucinda Morgan and Jack
Tramiel. The share records and minutes of Associated Canadian Hold-
ings2 show that Mrs. Morgan was the owner of only 15,000 common
shares out of a total outstanding of 315,600 and 37,500 preference
shares out of a total outstanding of 789,000. She was therefore clearly
not the owner of more than 10%, but C. P. Morgan was the registered
owner of 52,237 common shares and 130,590 preference shares. The
source of this information cannot be definitely attributed to Allen and
Cecil Manus, who signed the prospectus on behalf of themselves and their
two fellow directors, Lane and Obolensky, but is part of an obvious
design to conceal the appearance of C. P. Morgan's name in a document
filed with the Ontario Securities Commission and circulated in the finan-
cial community of Toronto. No liability to the Grand Bahama Develop-
ment Company in respect of the extras, settled at $250,000 and paid for
by Daylite of Grand Bahama on May 26, is shown or referred to. Pre-
1 Exhibit 181.
Exhibits 213-6.
542
Chapter IX
opening expenses for the hotel appeared on the financial statement as at
January 31, 1964 in the amount of $240,401, as organizational and staff
expenses incurred before the hotel opened.
The public issue of shares contemplated in the prospectus was
carried out, and is illustrated by the handwritten record contained in
Barrett, Goodfellow & Co.'s underwriting file.3 Of the 300,000 shares
sold, Daylite of Grand Bahama bought 200,000. Of the remaining
100,000, 75,590 shares were bought by the following persons or cor-
porations, all except Ocean Holdings Limited associated with Atlantic:
"Canadian Nevil Enterprises Limited 10,000
Dallas Holdings Limited 7,000
Shirley Feldman 4,000
Marty Fruitman 2,000
Albert M. Lando 2,000
Ruth Levinson 2,170
B. L. McFadden 2,000
N.G.K. Investments Limited 17,320
Nathan Saunders 5,000
Ocean Holdings Limited 20,000
Harry Wagman 3,500
Chartered Management Consultants
of Canada Limited 600"
However the share records of the Lucayan Beach Hotel Company do not
show these persons and companies as registered shareholders, but indi-
cate that 50,964 shares were registered in the name of Mrs. Mildred
Morgan on June 10, 1964 and 10,000 shares each in the names of W. L.
Walton and Harry Wagman on June 9, which accounts for all but 4,500
shares, generally speaking in the names of brokers. The Lucayan Beach
Hotel Company received for the sale of its 100,000 treasury shares the
net amount of $600,000 in Canadian funds, of which $461,000 was con-
tributed to pay for the shares registered in the names of Mrs. Morgan,
Walton and Wagman.
The sale of the 200,000 shares offered by Associated Canadian
Holdings is even more suggestive and requires close examination. Four
confirmation notices from Barrett, Goodfellow & Co.,4 each dealing with
the sale of 50,000 shares on July 16, show that the total sum required to
pay for 200,000 shares is $1,210,000 for a net yield to Associated
Canadian Holdings of $1,198,000, representing a price of $6.05 per
share, less deduction of transfer tax. The sale was recorded by Barrett.
Goodfellow & Co. as being to E. D. Sassoon Banking Company Limited
and was confirmed in that amount.5 The day before, Aurora Leasing
"Exhibit 2638.1.
'Exhibit 2638.3.
'Exhibit 2638.4.
543
Lucayan Beach and Dalite
had borrowed $1,300,000 from Commodore Sales Acceptance, and on
the same day paid $1,210,000 to the Canadian imperial Bank of Com-
merce by a cheque signed by J. C. Laidlaw and W. E. Pahn.6 Aurora
Leasing recorded this advance as a loan to Daylite of Grand Bahama.
The cheque to the Canadian Imperial Bank of Commerce marked "Draft
No. 1817976 — Barrett, Goodfellow & Company", and the brokers' credit
notice issued to "E. D. Sassoon Banking Company Ltd." gives particu-
lars of the amount credited as "draft Cdn. Imp. Bank Comm." Barrett,
Goodfellow and Co. had a ledger card for E. D. Sassoon Banking Com-
pany7 which is marked "account deleted", and underneath, almost com-
pletely erased, can be distinguished the name "Sassoon" and the words
"Attention B. Larbelestier, Nassau, British West Indies." That this is not
a mere inadvertence is shown by a confirmation notice with respect to
the purchase of the 200,000 shares addressed to Sassoon's, displaying
the same number as the number on the ledger card. Having been credited
with $1,198,000 by Barrett, Goodfellow & Co., Associated Canadian
Holdings, also on July 15, issued a cheque to British Mortgage & Trust
Company for $1,241,885 according to its general ledger,8 the additional
$41,885 apparently being interest on the loan. This payment had the
effect of paying off British Mortgage & Trust and releasing the $1,-
200,000 plus interest pledged with the trust company by the Lucayan
Beach Hotel Company. From the records of the former comes a certified
cheque in the amount of $1,200,000, drawn on it in favour of Daylite
of Grand Bahama by the Lucayan Beach Hotel Company, per Allen S.
Manus.9 This cheque was deposited to the credit of Daylite of Grand
Bahama at the Bank of Nova Scotia leaving $20,443.03 on deposit with
British Mortgage & Trust to the credit of the Lucayan Beach Hotel Com-
pany.10 Then Daylite of Grand Bahama issued a cheque on its Canadian
funds account at the Bank of Nova Scotia, No. 5160, and the cash
receipts book of Aurora records a payment of $1,200,000 against its
loan to Daylite of Grand Bahama which was paid back to Commodore
Sales Acceptance. All of these transactions took place on July 15. Out
of the balance of $100,000 Aurora made a separate advance of $50,000
to Daylite of Grand Bahama which treated this as an additional loan to
itself and paid it to Associated Canadian Holdings, which in turn
recorded it in its cash receipts book11 as payment for financial advisory
services. This payment more than took care of the amount of interest
which Associated Canadian Holdings had been required to pay British
Mortgage & Trust.
"Exhibit 2855.
'Exhibit 2857.
'Exhibit 2165.
"Exhibit 2858.
10Exhibit 2859.
"Exhibit 2165.
544
Chapter IX
The 200,000 shares of the Lucayan Beach Hotel Company, which
were the subject of these swift transactions, were delivered to Harry
Wagman, according to a delivery slip of Barrett, Goodfellow & Co., on
August 26, 1964.12 It refers to the shares as having been bought for
the account of the Sassoon bank and is signed by the recipient. Then,
on September 8, the assistant manager of the Sassoon bank wrote to
Barrett, Goodfellow & Co. referring to their statements dated June 30
and July 31 in connection with two accounts, asking for further details
and saying: "You will appreciate that no one can open an account in our
name without our express approval. We therefore accept no respon-
sibility for these transactions". R. A. Goodfellow replied in a letter
dated September 16,13 alluding to the two transactions in the following
words:
"The Seven Arts Productions trade was executed on the instructions
of Mr. Allan Manus. The stock was delivered to us through the Head
Office of The Toronto-Dominion Bank in Toronto, and we were given
the impression the stock was from your bank.
On the 200,000 Lucayan Beach Hotel 2/6d trade, the client should
have been shown as Dalite of Grand Bahama. The trade was consum-
mated on the instructions of Mr. C. P. Morgan, who acted on behalf of
Mr. Basil L. Arbelestier. These transactions have been cleared."
It is difficult to know what to say about all this camouflage, except to
express the conviction that no money came from the E. D. Sassoon
Banking Company, although some effort was made by someone who pur-
chased a draft at the Canadian Imperial Bank of Commerce to create
verisimilitude in the records of Barrett, Goodfellow & Co. It is possible,
from the tenor of Goodfellow's reply to which no answer was apparently
made, that Larbelestier had acquiesced in Morgan's use of the bank's
name, but that Morgan had neglected to ensure that confirmation notices
were not sent out.
Although Barrett, Goodfellow & Co. had only received five cents
per share as commission on the Associated Canadian Holdings block,
they were entitled to receive fifty cents per share from the treasury block
of 100,000. This was not, however, retained, for on July 21 they issued
a cheque in the amount of $33,333.33 to McLean, Campbell, Rogers,
Lyons & Kerr, their own solicitors, who in turn paid it to N.G.K. Invest-
ments, which, over the signature of C. P. Morgan as president, acknowl-
edged its receipt to Barrett, Goodfellow & Co. as "payment in full of the
finder's fee due to us in connection with the public offering in Ontario of
the shares of Lucayan Beach Hotel Company, wherein you acted as
agent for the Company and a group of shareholders in effecting the
"Exhibit 2861.
"Exhibit 2862.
545
Lucayan Beach and Dalite
offering." In the result Barrett, Goodfellow & Co. got only $26,666.67
of which they had to pay $6,443.50 to other brokers by way of split
commissions.
The effect of all this is an interesting example of what Morgan
could do with unchallenged control over the funds of Atlantic Accept-
ance. The $1,200,000 portion of the $1,300,000 loan made on July 15
by Commodore Sales Acceptance to Aurora Leasing simply went around
in a circle and back to Commodore Sales Acceptance, and in its travels
paid off the loan of Associated Canadian Holdings from British Mortgage
& Trust Company, releasing the moneys on deposit to the Lucayan
Beach Hotel Company to pay Daylite of Grand Bahama the $1,200,000
owed to it for the construction of the motel on Hong Kong Island. The
Lucayan Beach Hotel Company put up no money, because on the day
of its receipt Daylite of Grand Bahama paid it to Associated Canadian
Holdings to acquire the 200,000 shares. The Hotel Company actually
received the $600,000 for its 100,000 treasury shares and deposited this
amount in its account No. 10001 at British Mortgage & Trust.14 By
the end of August 1964, when the issue of shares had been completed,
Commodore Sales Acceptance was owed by Dalite Corporation $3,-
983,178, a substantial part of which had been advanced to Daylite of
Grand Bahama to build the motel, but when this company got its money
from the Hotel Company it invested it in shares of the latter without
making any payment on the indebtedness to Commodore Sales Accept-
ance. The 200,000 shares however were physically in the possession of
Harry Wagman and eventually in the hands of the Montreal Trust Com-
pany, as receiver and manager of Atlantic Acceptance, which treated
them as having been pledged as security for loans made by Commodore
Sales Acceptance, although there was no formal documentation to
support this assumption.
Daylite of Grand Bahama Foots the Bill with Atlantic Funds
Morgan was now on the rack to which he had been expertly bound
by Allen Manus. While Manus enjoyed the amenities of Lucayan
Beach, his specially-furnished apartment in the "Lanai" portion of the
hotel and a presidential yacht and aeroplane, Morgan had to find the real,
as distinct from illusory money to run the hotel and pay for the deficien-
cies of its management, of which, according to all accounts, Manus was
the principal cause. But, for the credit of the enterprise and any possible
chance of disposing of it profitably, it was important that the unsatis-
factory record of operations should be studiously concealed. Daylite of
Grand Bahama, being on the spot and dependent upon the loans made
by Commodore Sales Acceptance to Dalite Corporation for every penny
"Exhibit 2830.
546
Chapter IX
it received, was a convenient vehicle for carrying the Hotel Company's
load. Some examples of this must be given. On July 2, 1964 Daylite
of Grand Bahama paid Commodore Sales Acceptance $300,873.55
which the latter recorded as a payment received direct from the Lucayan
Beach Hotel Company, placing receipt of the money to the credit of
Dalite Corporation. The amount of this payment was apparently derived
from a loan made to Daylite of Grand Bahama by Barclay's Bank in
Nassau, according to a personal letter to C. P. Morgan dated April 7
from Terence Irish, the bank manager, addressed to "Powell Morgan,
Dalite Corporation (Canada) Limited, 75 Brown's Line, Toronto 14",
with the eventual approval of the Exchange Control of the Colony, in
the amount of .f.100,000.1 The letter refers to the fact that the bank's
solicitors are preparing a debenture which must have taken some time
to engross, because the bank's loan account2 does not show the money as
having been advanced until July 1. A memorandum from Morgan's
files, dated December 15, 1964, purporting to be a summary of advances
to and payments made on behalf of the Hotel Company by Daylite of
Grand Bahama3 has, under a column head "repayments", an entry of
$300,873.55 indicated as having been made on July 2, the narrative
explanation being "repayment Br. Mortgage." There is no explanation
of this reference which appears to have been made in error, since the
records of British Mortgage & Trust do not disclose any payment from
the Lucayan Beach Hotel Company at this time. There is, however,
evidence of an unusual expedient adopted to create the illusion of repay-
ment; in Wagman's records there is a cheque made by the Hotel Com-
pany to Daylite of Grand Bahama in the amount of $304,050 in U.S.
funds, dated June 22, 1964 but not negotiated. Since it was drawn on
the company's account No. 10001 at British Mortgage & Trust, the
cheque could not have been met in any event, because there was on that
date a balance of only $100 at credit. There are three other cheques,
the first dated July 22, 1964 for $36,250 in U.S. funds, signed by Manus
as president of the Hotel Company, and also payable to Daylite of Grand
Bahama;4 although at that date there was a balance in the British Mort-
gage & Trust account of $148,907.26, there was not sufficient to meet
both the outstanding cheques, even though the second one could have
been met at any time until August 5 at which date the balance was
reduced to $866.94. The third cheque is dated August 3, 1964 in the
amount of $15,075.45,5 similarly signed and not presented. The same is
true of the fourth cheque dated September 19 for $20,000, at which
time the balance in account No. 10001 was still $866.94 and did not
'Exhibit 2865.
'Exhibit 2866.
•Exhibit 2867.
'Exhibit 1074.2.
'Exhibit 1074.3.
547
Lucayan Beach and Dalite
vary materially from this point onward. During this period the Lucayan
Beach Hotel Company was getting funds from Daylite of Grand Bahama,
which was in turn getting them from Commodore Sales Acceptance
through Dalite Corporation, and these were used to operate the hotel.
Eugene Last was becoming increasingly restive under this procedure,
since he was constantly at loggerheads with Allen Manus. The total
amount advanced in this way to the Hotel Company at November 30,
1964, including interest, was shown on Morgan's memorandum as being
$906,531.55 in U.S. funds.
Masco Construction Company Limited
Reference has already been made to Masco Construction Company
Limited and its role, both intended and real, must be briefly examined.
The company was incorporated on September 6, 1963 as a private com-
pany in Ontario for carrying on the business of a general contractor,1
and a receiving order was made on September 13, 1965. After the
resignation of the incorporating directors who were members of the firm
of Salter, Reilly, Jamieson & Apple, the permanent directors were
Nathan Saunders, Harry Wagman and J. C. Laidlaw, each holding one
share, each issued at $1.2 The purpose for which the company was in-
corporated has been variously described by Morgan on his examination
for discovery in the bankruptcy of the company and by Eugene Last
president of Dalite Corporation.3 Morgan's account is confusing, as is
all the evidence he gave on these numerous examinations prior to his
last illness. It contains many half-truths and some outright fabrications.
According to him the company was set up to do construction work in
the Bahamas, and he admitted that Allen Manus and himself were the
principals by virtue of having lent money to Masco in a manner to be
described. Originally there were three; himself, Manus and a builder
by the name of Radomski from Scarborough, Ontario. Subsequently
Radomski withdrew and the project had to be reconsidered. Laidlaw
was Morgan's nominee, Wagman was brought in to take up Radomski's
interest, and Nathan Saunders was nominee for Manus. This last state-
ment must be measured against subsequent evidence Morgan gave on
the examination about Saunders acting for Masco as general co-
ordinator between interests of the Lucayan Beach Hotel Company and
Daylite of Grand Bahama, and particularly the fact that it was common
knowledge at all the construction sites that Saunders was Morgan's man.
Last gave a less edifying account of the reason for Masco's existence,
when he testified that it was to stand between Dalite Corporation and
Daylite of Grand Bahama, the former company to invoice Masco for all
Exhibit 416.
"Exhibits 254-5 and 416.
"Evidence Volume 64, pp. 8608-10 and Exhibit 3673.
548
Chapter IX
the manufacturing and shipping of materials for the Grand Bahama pro-
ject and Masco in turn invoicing Daylite of Grand Bahama at a mark-
up of 5 % , so that Morgan and Manus would profit personally from the
whole transaction. With all the advantages attendant on incorporating
a construction company to do real work in the Bahama Islands in the
Colony itself, and with Morgan's modus operandi in this matter evident
throughout all the transactions which the Commission has had to con-
sider, it is obvious that Last's explanation of the intended role of Masco,
an Ontario company, is the right one. Further according to Last, when
Morgan and Manus realized that sales by Dalite Corporation to Masco
would attract Canada sales tax, and sales by the former by way of export
to a Bahamian company would not, he was told to "forget about Masco"
and arrange to ship direct to Daylite of Grand Bahama. There were
additional difficulties mentioned by Last in connection with the certifica-
tion of goods going in bond through the United States. These went in
trailers shipped on railway flat-cars to Fort Lauderdale, thence by barge
to Freeport, and the interposition of Masco would have required real
operating expenses on the part of the latter.
Nevertheless the financing proceeded to a point. A handwritten bal-
ance sheet, from the Walton, Wagman & Co. file on Masco,4 as at July
31, 1964,5 shows "deferred liabilities— loans payable" of $200,000, indi-
cating that the company had borrowed that amount. The company's
deposit book shows that on October 13, 1963 the sum of $100,000 was
deposited in its bank account by W. R. Salter, arising apparently out of
an arrangement, recorded in his handwriting, containing instructions for
the incorporation of the company.6 It shows the participants as being
"(1) L.B. Hotel (2) Associated Canadian Holdings Ltd. (Morgan) and
(3) Z. W. Radomski." Each party was to contribute $50,000 at once,
in thirty days' time, and again in sixty days' time. Radomski was to be
president, Saunders vice-president and W. R. Salter secretary-treasurer,
and from this arrangement it is clear that Salter must have been repre-
senting his client Allen Manus, and Saunders C. P. Morgan. This
memorandum is dated August 19, 1963, but the picture changed owing
to Radomski's stopping payment on the cheque for $50,000 which he
had given to Salter, who had held this, together with one from the
Lucayan Beach Hotel Company and a third representing Morgan's con-
tribution, none of which were negotiated. Another memorandum of
Salter's, dated August 22, 7 refers to the decision of Morgan and Manus
to go ahead with Masco (then called Marr Construction Company) and
a new arrangement for the subscription was made. A payment of
$50,000 was received for the account of Ocean Holdings Limited, of
'Exhibit 726.
6Exhibit 726.1.
'Exhibit 2612.1.
'Exhibit 2612.4.
549
Lucayan Beach and Dalite
which Allen Manus was president, through E. T. Lynch & Co., and
Ocean Holdings was able to make this payment because it had sold
10,000 shares of St. Lawrence Industries to C. P. Morgan on August
20 through E. T. Lynch & Co., the money coming from Morgan's
account with Barrett, Goodfellow & Co.8 Morgan's contribution came
from the Trio account at the Guaranty Trust Company of Canada (No.
13324), according to the evidence of its passbook9 and a cheque book,10
on September 11, and the contribution of the Trio account was made
possible by its holding a profit of $140,000 made on the transaction of
July 10, 1963, discussed at length in Chapter VIII. It was intended that
Morgan and Manus would each put up an additional $50,000, but
although another cheque was written on October 17 on the Trio account
for $50,000 it was not negotiated, and the second contribution came
from the Lucayan Beach Hotel Company which, in its prospectus dated
May 29, 1964,11 shows an amount of $139,233 designated as a loan
receivable, and the approximate equivalent of $150,000 in Canadian
funds. The question of the participation of the Hotel Company in
Masco Construction Company was raised in a letter dated September
22, 1964, to Jules Kofman, of the Perlmutter, Orenstein firm, by Edward
R. Fingland of Price, Waterhouse & Co. in Nassau, dated September 22,
1964, which should be quoted in part.12
"I had a long meeting with Mr. Alan Manus in Freeport last week as
we are trying to straighten out the accounts of the hotel at 31st July. I
understand you can answer two of my queries which are: —
( 1 ) Apparently the company made a profit of $200,000.00 by selling
an option. This, I believe, had something to do with a construc-
tion company at Freeport. Nobody here has any information in
regard to this.
(2) As you know, a deposit was set aside with the Morgan Guaranty
Bank for the construction of the Lucayan Village. The hotel are
suppose to be keeping the books for this subsidiary company but,
so far, nothing has been done. I shall be glad if you will tell me
what payments have been made from this deposit and whether
you have been keeping any books in connection with this com-
pany."
Kof man's reply, specifically on these points, was as follows:
"In reply to your letter of September 22nd, 1964 we advise as follows:
1. On the balance sheet of the hotel as at January 31, 1964 there
was a loan receivable in the amount of $139,233 which was the
'Exhibit 504.
•Exhibit 807.
10Exhibit 2881.
"Exhibit 181.
"Exhibit 2623.11.
550
Chapter IX
U.S. equivalent of $150,000 Canadian funds. It had been intended
that the hotel participate in a construction company in Freeport,
the name of which was Masco Construction Limited. Subsequently,
an agreement was made whereby the hotel surrendered its rights to
participate and received $200,000 in settlement of all claims.
2. The name, Morgan Guaranty Bank, is not a familiar name to us,
however, we believe that you must be referring to the amount
which was deposited with the British Mortgage & Trust Company
in Toronto of $1,200,000 Canadian funds."
This payment of $200,000 was received by the Lucayan Beach Hotel
Company but not credited against the loan receivable. Instead it was
added to the capital and contributed surplus account and described as
"sale of rights in Masco Construction Company of construction con-
tract— joint venture — received from Daylite G.B. by set-off against
advances". Since the loan to Masco by the Hotel Company remained
outstanding, this is apparently the second example of a gift to it by Day-
lite of Grand Bahama, which had no interest in Masco itself, to its own
detriment. By the end of June 1964 Commodore Sales Acceptance re-
corded $3,287,624 as loans outstanding to Dalite Corporation in respect
of the Lucayan projects; yet every effort was being made to enhance the
appearance of the Hotel Company's financial statement, and it is on the
record, in the shape of a handwritten memorandum of a telephone call
with Albert A. Shelman made by W. R. Salter, and dated September 1,
1964, that attempts were again being made to obtain financing for the
hotel complex, the memorandum reading, "Powell Morgan in England
to try and get $9,000,000 Barclay's first mortgage on everything, hotel
— marina — apartments — motel."
Other aspects of the activity of Masco Construction Company
under Morgan's direction have already been mentioned, particularly the
activity of its trading account with Barrett, Goodfellow & Co. in relation
to purchases and sales of the stock of Commodore Business Machines
and Analogue Controls. It was to take a further step in March 1964
which resulted in commutation of rental payments to Daylite of Grand
Bahama for the 110 efficiency units, turned over to the Lucayan Beach
Hotel Company at this time, in respect of which the lease agreements
between the former as lessor and the latter as lessee have already been
noticed. By cheques in the amount of $410,400, dated January 31,
1964,13 and for $342,000 on March 9,14 drawn in favour of Daylite of
Grand Bahama by Masco Construction and signed by Nathan Saunders
and H. Wagman, an aggregate amount of $752,400 in Canadian funds
was paid in exchange for notes of Daylite of Grand Bahama with a face
'Exhibit 2885.
'Exhibit 2886.
551
Lucayan Beach and Dalite
value of $990,000, which Masco discounted with Commodore Sales
Acceptance for $792,000, thus making a net profit of $39,600 or exactly
5% of the amount advanced. The notes were payable in U.S. funds,
and it appears from the "instalment notes receivable" ledgers of Com-
modore Sales Acceptance15 in connection with this transaction that there
were two ledger accounts, numbered 1 and 2, showing original entries of
$540,000 and $450,000 in U.S. funds respectively. The collateral
ledger16 shows notes in the amount of $900,000 and sixty additional
notes, each bearing the face amount of $1,500 and making a total of
$990,000 in U.S. funds, lodged as security with Atlantic Acceptance
Corporation. These notes,17 the first of which is payable on February
15, 1964, and the last on January 15, 1969, were drawn in favour of
Masco Construction Company by Daylite of Grand Bahama for which
Eugene Last signed, endorsed over to Commodore Sales Acceptance by
Nathan Saunders and J. C. Laidlaw for Masco, and further endorsed for
the Lucayan Beach Hotel Company by Allen S. Manus. The leases,
which were at the same time assigned to Commodore Sales Acceptance,
were thus in effect discounted by Daylite of Grand Bahama, and if it
had done so directly it would have received $39,600 more than it did
as a result of the interposition of Masco. On his examination for dis-
covery Morgan sought to justify the retention of this profit by Masco as
recompense for the supervisory work done by the company on the
Lucayan projects in the person of its president Nathan Saunders, about
the efficacy of which there are a number of opinions, mostly derogatory.
He was surprised that only the $90,000 worth of $1,500 notes were
endorsed by Manus for the Hotel Company, asserting that this endorse-
ment was supposed to have been made on all the notes totalling
$990,000. At June 17, 1965 Masco owed Commodore Sales Accept-
ance $817,427.63, and Morgan contended that Masco should be relieved
of its indebtedness to Commodore Sales Acceptance because of the sub-
sequent purchase by the Hotel Company of the efficiency units, a trans-
action which is yet to be described. His reasons, given not very lucidly
in answer to questions put by Mr. H. R. Poultney, appearing for the
trustee of the bankrupt estate of Masco, were as follows:18
"A. As far as I am concerned the notes that are outstanding and receiv-
able in Masco at the present time should not be in existence, they should
be cancelled because they were — when the Hotel Company bought the
property they took over the earning asset which is the employees quar-
ters. Masco should be relieved of its liability to Commodore and the
Hotel Company should be relieved of its debt to Masco as part of the
"Exhibit 2887.
"Exhibit 2888.
17Exhibit 2889.
"Exhibit 3673.
552
Chapter IX
lease or the guarantee. Technically what should have happened is that
when the Hotel Company bought physical assets they bought them with
the lease intact, therefore, in essence at the present time Masco should
be continuing to collect from the Hotel Company the rent each month
and turn around and pay it over to Commodore Sales Acceptance each
month, that is what should be happening right now and therefore as far
as Commodore is concerned it is like taking it out of one pocket and then
the other, what they should do is just reduce the indebtedness or increase
the indebtedness that is owing by Dalite and reduce the indebtedness that
is owing by Masco, it would be the same, six of one and half a dozen of
the other."
According to Eugene Last, Allen Manus used the investment of the
Lucayan Beach Hotel Company in Masco Construction Company as an
offset against advances made to it by Daylite of Grand Bahama,
although this explanation does nothing to make compatible the $200,000
added to the Hotel Company's contributed surplus and the loan receiv-
able from Masco which it showed in the amount of over $139,000. The
unsatisfactory state of the accounts of the Hotel Company must in-
evitably obscure the true nature of these transactions, except in so far as
they tend to confirm the general impression that Atlantic Acceptance
indirectly put up all the money in the end and the Hotel Company none.
Morgan's Dilemma: The Displacement of Allen Manus
Two main considerations were henceforth to govern the actions of
C. P. Morgan in the Lucayan situation, once he had taken the measure
of Allen Manus. The first was to displace the latter as effective head of
the Lucayan Beach Hotel Company and to get the management of the
hotel under his own control, and the second to secure long-term financ-
ing for the whole enterprise to supersede the haphazard accumulation of
unsecured and partly-secured loans which had sprung from the original
commitment to build the efficiency units. It has been seen that Atlantic's
position in the equity of the Lucayan Beach Hotel Company was in-
sufficient to give it effective control because of the existence of the de-
bentures given to Freeport International Company. Another item of
Morgan's complaint against Manus was what he described as the careful
concealment of the terms of the mortgage given by the Hotel Company
to the Development Company which was payable in only two years'
time. By the end of December 1964 Atlantic's involvement, through
loans and investments made by subsidiary and associated companies,
reached a level of $9,485,000, over $6,225,000 of which had been
advanced to Dalite Corporation for further advance to Daylite of Grand
Bahama, and these amounts do not include interest accrued on these
553
Lucayan Beach and Dalite
loans. Since the commitments and performance of Dalite Corporation
and Daylite of Grand Bahama are to be discussed in some detail here-
after, it is sufficient to say that during 1964 it had built forty additional
apartments and was engaged in building the marina and the 150-room
motel. There were also other jobs in progress such as the Drivers' Club,
a sewage disposal plant and a laundry. The construction of the motel was,
of course, crucial to the agreement between the Hotel Company and the
Development Company, and everything could be said to hinge on its
completion. Writing on November 10, 1964, a correspondent, signing
himself "Bob", sent a private and confidential letter to C. P. Morgan,
with a copy to Harry Wagman, saying generally, under the heading of
"The Marina", that the motel units were complete and some had been
occupied by guests of the hotel two days previously. Thus one of the
principal difficulties faced by the Lucayan Beach Hotel, that of shortage
of revenue-producing accommodation in relation to the costly provision
of public space, was in part alleviated. This unidentified correspondent,
who was probably R. W. Pollock, a chartered accountant employed by
Chartered Management Consultants to keep an eye on the various jobs
undertaken by Daylite of Grand Bahama, had, amongst other things, the
following to say in his letter which gives a good idea of the atmosphere
in which the hotel was operating in this period of extensive construc-
tion:1
"Before summarising in detail, the status on each project, I would like
to offer comments on the method of operation apparent to me. A great
deal of time is lost in the complete lack of co-ordination and planning of
detail. Workers are moved from one site to another before completion of
any one task. On occasions this situation is caused by lack of materials,
but more often than not, the cause is a change of emphasis by manage-
ment. As a result, no single phase of the Lucaya operation has yet been
completed in its entirety, and there is severe local criticism to this effect,
particularly with regard to the apartments and homes. It is true that the
buildings are completed, but the surrounding area is in the most appalling
condition, with rocks, broken glass and garbage still lying around from
the original construction. No landscaping had been attempted until a
couple of days ago, when again after strong representation by me, a
certain amount of clearing up has been started in the area of the 40
houses. I might also add that the entrance to this particular area is a
disgrace."
Inside the hotel matters were scarcely in better order, and finally the
Grand Bahama Development Company in the person of its executive
vice-president, W. P. Fisher, was moved on January 27, 1965 to write
to the Lucayan Beach Hotel Company, to the attention of Allen S.
Exhibit 2892.
554
Chapter IX
Manus, with copies to Eugene Last and C. P. Morgan, the following
letter, in which the threatening implication is clear:2
"Gentlemen:
The Development Company has received numerous complaints con-
cerning the operation of the Hotel, particularly with regard to the lack of
service and inadequate service to guests. These complaints have been
received over an extended period of time and have become even more
pointed this month.
In the Deed of Covenant between the Grand Bahama Development
Company, Limited and the Lucayan Beach Hotel Company, dated 18th
January, 1964, paragraph 3, sub-paragraph 1, reads as follows:
"(1) To observe, perform and comply with all the covenants, provi-
sions and conditions in the Government Agreement contained,
and on the part of the Port Authority thereby to be observed or
performed so far as the same relate to the Hotel Company's land
or to any part thereof or to anything done, carried on or omitted
thereon or in respect thereof or in respect of any operation or
business undertaking or enterprise of any kind at any time carried
on by or on behalf of the Hotel Company within the Residential
Area and in particular and without limiting the generality of the
foregoing."
In the Government Agreement with the Port Authority, supplement
dated 11th July, 1960, paragraph 1, sub-paragraph 1, contains the pro-
vision that a hotel of not less than two hundred (200) bedrooms with all
reasonable amenities in the Port Area be constructed and, upon com-
pletion of the hotel, to be furnished as a first class De Luxe Resort Hotel,
and thereafter operated in accordance with the highest standards obtain-
able for the operation of like De Luxe Resort Hotels in the U.S.A.
From the above it is apparent that this is not merely a matter of local
concern, but has implications of serious involvement with the Govern-
ment of the Bahamas.
It is necessary, therefore, that the Development Company insist on
exact compliance with the Deed of Covenant with regard to the operation
of the Hotel."
It was obviously time for C. P. Morgan to take the action which he had
told Eugene Last, and others who had complained of Manus's behaviour,
was inevitable, and "have Atlantic take over the hotel".
To do so a Bahamian company was formed, called L. B. H. Manage-
ment Company Limited, on or about February 5, 1965.3 The incorpo-
rating shareholders were C. P. Morgan, Jack Tramiel, Baron Seband
von Rheden-Rheden, Wolfgang Wirth and Bernard A. Thompson, a
•Exhibit 2891.
•Exhibit 2588.
555
Lucayan Beach and Dalite
lawyer in the office of Peter D. Graham, who were each issued a <£1
ordinary share.4 The Baron and Wirth have been identified before as a
director and the general manager respectively of the Hugo Oppenheim
und Sohn Bank in Berlin, and were brought to Lucaya by Tramiel to
whom Morgan had turned for advice in this particular crisis. Tramiel, in
his testimony before the Commission, was vague about the dates of his
visits to the hotel, but, from other evidence which concerns the Berlin
bank, his first visit must have been in November 1964 and the second at
about Christmas time of that year when he took his wife. On the second
occasion, because of the interest of Associated Canadian Holdings in
Five Wheels of Grand Bahama and Daylite of Grand Bahama, he made
enquiries from people on the spot and soon got the impression that some-
thing was wrong. Eugene Last and Allen Manus were quarrelling and
the latter, in Tramiel's words, appeared to be running a private club for
himself, and to be entertaining people from the United States on a large
scale at the hotel's expense. Upon his return to Toronto in January he
reported what he had seen and heard to Morgan. The service had been
very poor and there was a shortage of help. Morgan confessed that he
was troubled and asked Tramiel to help him. He indicated that he
wanted to get rid of Manus, telling Tramiel that he v/as in a position to
do so. Tramiel agreed to spend a few days every month at the hotel,
where Manus told him in an early consultation, "I am dealing directly
with Morgan, just get to hell out". Nathan Saunders confided in Tramiel
and this did nothing to improve his relationship with Eugene Last.
Tramiel's solution was to bring in von Rheden, who had apparently
convinced him that he knew something about the hotel business, and
thus L. B. H. Management was formed. Manus evidently had no alterna-
tive but to give up control of the operations of the hotel, because it had
no money and he was in no position to supply it. The contract between
the Lucayan Beach Hotel Company and Dinkier Management Corpora-
tion, not yet a year old, was terminated, and by an agreement dated
March 6, 19655 the Hotel Company rented the hotel to L. B. H. Manage-
ment for a period of eight years and ten months at a monthly rental of
$41,666.67, with the provision that in the second and subsequent years
of the term of the lease half the net profits of L. B. H. Management were
to be paid to the Hotel Company. L. B. H. Management bound itself
to pay all of the outstanding accounts owed by the Hotel Company, and
took over all its accounts receivable, on the understanding that if there
were an excess of accounts receivable over accounts payable it would
reimburse the latter. The rentals of the casino and the twelve stores in
the hotel were excluded from this provision, and paragraph 18 of the
agreement provided that the term granted to L. B. H. Management was
'Exhibit 2588.
D Exhibit 2893.
556
Chapter IX
subject to the mortgage to the Grand Bahama Development Company,
and the debentures given to Freeport International and assigned to Cecil
Manus for $1,200,000. As an additional inducement, and one that Allen
Manus could scarcely resist, L. B. H. Management prepaid the first year's
rental in the sum of $500,000 U.S. funds, although the available records
of the company show no trace of this very substantial item. Commodore
Sales Acceptance once more provided the money, recording it as a loan
in the amount of $542,000 in Canadian funds, of which $540,000 was
converted into U.S. funds and was deposited on April 30, 1965 in an
account at British Mortgage & Trust Company, No. 10050.6 Thereupon
L. B. H. Management drew an undated cheque on this account which
was nevertheless paid and deposited to the credit of the Lucayan Beach
Hotel Company on April 30. 7 This cheque, signed for L. B. H. Manage-
ment by Jack Tramiel, was deposited in the Hotel Company's British
Mortgage & Trust account No. 10001,8 withdrawn by it on the same day
and paid to the Daylite of Grand Bahama account at the Bank of Nova
Scotia.9 Again on the same day Daylite of Grand Bahama paid the
$540,000 over to Commodore Sales Acceptance which credited its loan
account with Dalite Corporation to this extent.
The effect of this transaction was twofold, in that it substituted
L. B. H. Management for Dalite Corporation as a debtor of Commo-
dore Sales Acceptance to the extent of $540,000, and it effected a settle-
ment of the claims of Daylite of Grand Bahama for advances to the
Lucayan Beach Hotel Company. The settlement, according to Last's
evidence, was negotiated personally between Morgan and Allen Manus,
and on April 10 Daylite of Grand Bahama gave a deed of release10
to the Lucayan Beach Hotel Company in respect of all claims, except
those arising out of the obligation to buy the marina, efficiency units
and apartments contained in an agreement made and executed on the
same day.11 A settlement in this amount was manifestly unfair to Daylite
of Grand Bahama, and was recognized to be so by the Montreal Trust
Company and the existing board of directors of the Lucayan Beach
Hotel Company after Atlantic's default, at which time it was re-negotiated
by increasing the purchase price for the marina and apartments by
$400,000. A reconciliation of advances by Dalite Corporation and
Daylite of Grand Bahama to the Hotel Company, from the beginning to
August 31, 1965, and repayments, real and notional, by the latter, was
entered in evidence12 and may here be conveniently introduced. Amounts
are shown in United States funds.
"Exhibits 2894-5.
'Exhibit 2896.
8Exhibit 2897.
BExhibit 2860.
"Exhibit 2914.
"Exhibit 2908.
12Exhibit 3189.
557
$1,126,795.29
Lucayan Beach and Dalite
"(1) Advances per existing records of Day lite of
Grand Bahama
General advances— 1964 $643,000.00
Payment of utility bills 115,610.91
Sundry payments 23,684.38
Net advances— January 1965 94,500.00
Payment to Grand Bahama Development Co. 250,000.00
Additional advances recorded by the hotel
Z.I.A., rent 10,896.91
Advance through British Mortgage
and Trust Co 55,555.56
66,452.47
Total advances billable by Dalite 1,193,247.76
Other charges — employee housing rentals 101,500.00
— tennis club house 17,350.00
1,312,097.76
(2) Less: Repayments per Daylite records
April, 1965 settlement for cash 500,000.00
Write-offs — re Masco participation 200,000.00
— re Development Company
settlement 250,000.00
950,000.00
Less: Additional repayments per
the Lucayan Beach Hotel
January 1965 cash repayment .. $ 32,000.00
Cheques drawn on British
Mortgage and Trust Co 150,000.00
1963 advance to Masco
Construction 139.232.67
321,232.67 1,271,232.67
(3) Balance written off $ 40,865.09
(1) This excludes payments of $94,310.06 to A. Manus for securities and
also any interest charges on the whole account.
(2) This excludes a Barclay's Bank mortgage payment of $278,584.84
which did not constitute a hotel repayment on the advance account.
(3) There is an additional write-off of $15,074.45 by the hotel which
represents an error in their accounting."
L. B. H. Management Limited and Baron von Rheden
L. B. H. Management did not do any better in running the Lucayan
Beach Hotel than its predecessors and, according to Chesler, Baron von
Rheden was a conspicuous failure as the manager of the hotel. Von
Rheden's account was given to the Commission on August 6, 1966 at
his estate at Rheden uber Elz near Hannover.1 Tramiel had discussed with
him the difficulties which had been encountered in operating the hotel as
early as January 1965, and expressed his desire to get rid of Manus.
Subsequently he asked von Rheden to come with his wife and daughter
to Miami on March 3, and the von Rhedens were met there by Morgan
and Tramiel and their wives, going thence to Freeport, where they were
'Commissioner's notes on conversations in Germany.
558
Chapter IX
met by Manus and "luxuriously installed" at the Lucayan Beach Hotel.
Although von Rheden had believed that he would only stay for a period
of a week, he found himself in the middle of negotiations for the estab-
lishment of L. B. H. Management of which he learned he was to be presi-
dent and an equal shareholder with Morgan and Tramiel, requiring a
contribution of $60,000 in the form of an option if he were unable to pay
for his shares forthwith. It was apparently at von Rheden's suggestion that
Wirth was made a director of the new company. After having examined
the books of the hotel he concluded that Manus had incurred large
expenses for his own account, including those of his private aircraft with
its own pilot, a boat with its own master and a Lincoln Continental car.
Manus had drawn heavily on the hotel's stocks of food and liquor and
there were apparently innumerable guests of his staying at the expense
of the hotel, presumably on the theory that this would promote business.
Von Rheden said that he put a stop to this particular aspect of Manus's
extravagance.
According to his own relation, von Rheden stayed at Lucayan
Beach until early in June, but may well have left earlier. Tramiel said
that at first the Baron's relationship with Allen Manus was cordial, but
soon both Manus and Morgan were complaining of his management. In
the case of Manus this change of attitude was no doubt due to restric-
tions which the new management had placed on his own activities, and
in that of Morgan to the fact that improvements made by von Rheden
in the hotel service were as expensive as Manus's promotional activities
had been; the desired savings in operational expense did not materialize.
Von Rheden at least thought that he had checked the widespread pilfer-
ing of food and drink, particularly by the native employees, which had
hitherto prevailed, but he found the special status accorded to gamblers
flown in from the mainland as difficult to handle as had Manus, who
referred bitterly to Myer Lansky's three lieutenants, Courtney, Ritter
and Brudener, as "the three mongrels". Morgan and Last reacted predic-
tably to this new intrusion into the affairs of Lucayan Beach which they
attributed to the influence of Tramiel. Morgan, with his many preoccu-
pations and his apparent inability, as Tramiel described it, to say no to
the last man he spoke to, was apparently quite unable to establish the
desired control through L. B. H. Management. He told Tramiel that
he had to "go along with Manus" because of the pending underwriting
of 3,000,000 shares of Lucayan Beach Hotel Company, which was
expected to bring $9,000,000 into the treasury and relieve Atlantic
Acceptance of most of its burden. Morgan, indeed, said in his testimony
that Manus made constant efforts to secure permanent financing for the
Hotel Company, even with George Weinrott of Cimcony Limited, and
was constantly making expeditions to England and Switzerland to get
financial backing. None the less three new directors, representing the
E. D. Sassoon Banking Company, were added to the board of the Hotel
559
Lucayan Beach and Dalite
Company on May 6, and Morgan said that he had secured Manus's
agreement to remain only as nominal head and to withdraw permanently
from Grand Bahama Island, when the Atlantic default upset all his
calculations.
Whatever the understanding was as to contributions to the capital
of L. B. H. Management by Morgan, Tramiel and von Rheden, it does
not appear from any available record that one was made. Tramiel
became convinced that the hotel was not a business proposition and
withdrew. For a time, at least, L. B. H. Management was financed by
Trans Commercial Acceptance. The Trans Commercial Acceptance
ledger dealing with advances to L. B. H. Management shows that from
April to June 1965 they were made in the total amount of $189,372,
and that between May 3 and May 31 Commodore Sales Acceptance
advanced $186,425 to Trans Commercial Acceptance. Those by Trans
Commercial Acceptance to L. B. H. Management were secured only by
notes.2 The records of L. B. H. Management available to the Commis-
sion were found in the form of monthly statements, one being a hand-
written balance sheet, as at March 31, 1965, in the files of Wagman,
Fruitman & Lando. A capital investment of $185,169 is shown, but there
is no record of any shares having been issued and no other explanation.3
A profit is shown for the month of March of $39,742, but for the month
of April a cumulative profit of this and the preceding month is shown
at $2,060, so that a loss of approximately $37,000 must have been
suffered in April. The April balance sheet contains no record of the pre-
payment of rent in the amount of $500,000 as an asset, nor any record
of the debt to Commodore Sales Acceptance in connection with it. Then
the statement for May4 shows, in the equity section of the balance sheet,
the amount of $186,425 which had been advanced by Commodore Sales
Acceptance to Trans Commercial Acceptance, described simply as
"Atlantic Acceptance Corporation". Very little sense can be made out
of these fugitive records, nor is there much point in attempting to recon-
cile the amount of $185,169, shown as a capital investment in March,
and the total amount of advances of Trans Commercial Acceptance,
secured in turn from Commodore Sales Acceptance, with von Rheden's
account of the contemplated $180,000 capital investment of which he,
in any event, was prepared to pay $60,000 for shares, until Tramiel told
him that he had withdrawn from the enterprise. It is sufficient to say
that all the money referred to, and perhaps more, came, one way or
another, from Atlantic Acceptance.
The last contemporary report on the state of the hotel which has
come into the hands of the Commission, describing the state of affairs
prevailing after the second impact of a peak tourist season, was pro-
-"Exhibits 2898 and 2900-1.
3Exhibit 1091.
'Exhibit 1090.
560
Chapter IX
duced by R. W. Robertson, the comptroller of the Lucayan Beach Hotel,
addressed to Jack Tramiel and C. P. Morgan and dated May 18, 1965,
in which he lists items of operation which he thinks should be corrected
and makes a number of suggestions for improvement. Generally speak-
ing, the staff, which he said was too numerous and too highly paid, was
still the principal problem. There were too many breakages, too much
pilfering, and cleaning was not adequately done. Nor did the staff
appear to take any personal pride in the operation and, with some excep-
tions, its members were poorly turned out and had little regard for their
own appearance. He referred, as might be expected, to the "ghost of
past management", and suggested that there either be new management
of the hotel or that the existing management be given clear authority to
make such changes as elimination of unnecessary and undesirable staff,
particularly in the sphere of maintenance, the purchase of new uniforms,
linen, silver, crockery and so forth, the reduction of maintenance and
the vesting of all public relations work in the general manager. He spoke
kindly of the work done by Nathan Saunders who was working to
improve the security system in the hotel and was in charge of the Drivers'
Club, not part of the hotel complex. It should be said that no one else
has a good word to say for Nathan Saunders, and his numerous written
and verbal communications with the Commission have been remarkably
incoherent and vituperative. He was eventually bundled off Grand
Bahama Island, together with his family, in a most unceremonious manner
by the authorities, and this may have been the culmination of many
derogatory and even defamatory references to Allen Manus, Last and
others. He seems, like Pollock, to have been a victim of Morgan's
inability to make up his mind and give clear directions as to what he
expected his representatives to do, and what authority they were to be
given. There was also, according to Robertson, trouble with the coloured
staff who threatened strikes when any disciplinary action was taken. He
concluded by saying, "I think there is a general upgrading of the hotel
but it is only a start".5
Morgan's Scheme to Liquidate the Debt of Daylite of Grand Bahama
In the meantime Morgan had made a second and parallel effort to
relieve the burden resting on Dalite Corporation and Daylite of Grand
Bahama, and to supplement the settlement for $500,000 of the claims
of the latter against the Lucayan Beach Hotel Company. It was done
with typical disregard for the ultimate position of Atlantic Acceptance
and its subsidiary Commodore Sales Acceptance, but Morgan was sensi-
tive about the size of the loans made by the latter to Dalite Corporation,
particularly since, as he himself admitted, David Rush, and perhaps
other potential blackmailers, knew of the size of the loans and his own
"Exhibit 1098.1.
561
Lucayan Beach and Dalite
25% interest in the company, the evidence of which will be referred to
hereafter. By the agreement dated April 10, 1965,1 executed for Daylite
of Grand Bahama by Jack Tramiel, who had been appointed a vice-
president and had, according to Last's evidence, limited authority to
dispose of certain assets of the company, and for Lucayan Beach Hotel
and Development Limited (as it was now styled) by Allen S. Manus, the
marina, the 110 efficiency units and the "apartments", which were an
additional 40 one and two-bedroom housing units, constructed during
1964, were sold to the Hotel Company for a total consideration of
$3,880,000 in U.S. funds. The agreement does not recite the proposed
transfer of the efficiency units, but comparison of the lot numbers referred
to with those enumerated in the first agreement between Daylite of Grand
Bahama and the Grand Bahama Development Company, dated Novem-
ber 20, 1963,2 shows that they were included under the general descrip-
tion of apartments. The purchaser was to assume the vendor's obligation
to repay the Grand Bahama Development Company the $100,000 which
it had advanced originally to Five Wheels of Grand Bahama towards
the construction of the marina, an obligation which had been assumed
by Daylite of Grand Bahama and not yet discharged, and $3,780,000
cash, broken down into $3,500,000 payable forthwith and a balance of
$280,000 after thirty days, during which time the vendor and its sub-
sidiary company, The Lucayan Marina Limited, expected to produce
the documents of title to the various lands which it had not yet received
from the Development Company. The Hotel Company thus had to pay
forthwith $3,500,000 it did not have. Accordingly, its president, Allen
Manus, wrote to the Crown Trust Company in Toronto on the same
day, giving it, as transfer agent, "irrevocable authority and direction" to
issue 1 ,250,000 ordinary shares of Lucayan Beach Hotel and Develop-
ment Limited, at a par value of five shillings each, to Hugo Oppenheim
und Sohn of Berlin.3 It was not until June 7 that the trust company's
transfer department wrote to Hugo Oppenheim und Sohn announcing
the issue, saying that the new share certificates were not as yet available
but would be sent when forthcoming, making a note on its copy of the
letter to the effect that the certificates were to be delivered to A. G.
Woolfrey at Commodore Sales Acceptance.4 By this time, indeed on
April 30, Commodore Sales Acceptance had duly provided the money
by issuing a cheque for $3,780,000 in Canadian funds to British Mort-
gage & Trust Company, which was deposited in account No. 4300 to
the credit of Hugo Oppenheim und Sohn and was recorded by Commo-
dore Sales Acceptance as a loan to the German bank.5 On the same day,
by another undated cheque, stamped by British Mortgage & Trust Com-
'Exhibit 2908.
'Exhibit 2823.
'Exhibit 2909.
'Exhibit 2910.
"Exhibit 2911.
562
Chapter IX
pany, "April 30", Hugo Oppenheim und Sohn paid Lucayan Beach
Hotel and Development the full amount of the deposit of $3,780,000 in
Canadian funds. The cheque, which is on the form provided by British
Mortgage & Trust Company at 2200 Yonge Street in Toronto, bears the
stamp "Hugo Oppenheim & Sohn Nachf. Berliner Privatbank Aktien-
gesellschaft", and is signed by Wolfgang Wirth and Frau Ehlitt.0
Hugo Oppenheim und Sohn's Blank Cheques
The Hugo Oppenheim cheque was deposited with British Mortgage
for credit to the Hotel Company's account No. 10001 and the latter
thereupon drew a cheque for this amount in favour of Daylite of Grand
Bahama; this was in turn deposited in the recipient's Bank of Nova
Scotia account and at once withdrawn by a cheque in favour of Commo-
dore Sales Acceptance, which correspondingly credited its own account
with Dalite Corporation. Thus this very large sum returned to its source,
and accomplished in its passage the transfer of $3,780,000 of the
indebtedness of Dalite to Commodore Sales Acceptance over to Hugo
Oppenheim und Sohn, the reduction of the Hotel Company's liabilities
to Daylite of Grand Bahama by that amount and the sale of 1,250,000
shares of the Hotel Company's stock to the German bank which were
retained as security by the company that launched it on its circular
path.
Without delving too deeply at this point into the affairs of the
Berlin bank, it should be said that Wirth told the Commission, at Nuern-
berg on August 1, 1966, that in February 1965 Jack Tramiel, as chair-
man of the board of his bank, asked for, among other documents, two
blank cheques drawn on British Mortgage & Trust Company. Wirth
appeared to be very uncomfortable in his explanation of this transaction,
as he might well be, saying that Tramiel had assured him that, since
there were only a few hundred dollars of the bank's money at British
Mortgage & Trust, the latter would never pay more than the balance at
credit and that, since he, Tramiel, was a big business man and from time
to time wanted to conceal the source of money which he was using in
his international transactions, this extraordinary concession should be
made to him. Wirth somewhat lamely concluded by saying that,
although Tramiel held power of attorney to purchase securities for the
bank in North America, at no time was he authorized to pledge its credit
for $3,780,000, and that no advice was received from Crown Trust
Company that it was issuing the Hotel Company shares. In view of the
explicit terms of the trust company s letter of June 7, stating the number
of shares to be issued to Hugo Oppenheim und Sohn, this is difficult to
believe. A long question outlining this transaction was put to von Rheden
by Mr. Shepherd on the occasion of the Commission's interview, but was
•Exhibit 2912.
563
Lucayan Beach and Dalite
never explicitly answered. Dr. Edgar Hochgraeber, who was also inter-
viewed in Nuernberg and who had acted for Tramiel throughout his
connection with the bank, had not heard of the transaction until after
the Atlantic collapse.
By purchasing 1,250,000 shares of the Hotel Company, or all that
remained in the treasury, Hugo Oppenheim und Sohn had acquired
12Y2% of its issued stock at a price of <£1, or $2.80 U.S. per share.
The price was quite arbitrary, and contrived to give to the 10,000,000
issued shares of the company a value of $28,000,000 in U.S. and $30,-
240,000 in Canadian dollars. The shares, however, remained with Com-
modore Sales Acceptance as security for the unsolicited loan to the
German bank. Lucayan Beach Hotel and Development had still to find
$280,000 in U.S. funds to complete its purchase from Daylite of Grand
Bahama within thirty days, and this it did by mortgaging the apartments
to Bahama Saving & Loan Company through its subsidiary company,
the Lucayan Apartments Company, on May 8. The mortgage secured
the sum of $294,000 to produce the required $280,000. Thus, including
the settlement of claims against the Hotel Company for the amount of
$500,000 in U.S. funds or $540,000 in Canadian funds, Daylite of
Grand Bahama was able to reduce the loans of Commodore Sales
Acceptance to Dalite Corporation by $4,320,000, as illustrated on Table
45. While beneficial to Dalite Corporation, this made little difference to
Commodore Sales Acceptance which now had Hugo Oppenheim und
Sohn as a debtor, together with L. B. H. Management, instead of Dalite
Corporation. Tramiel, and whoever else represented Daylite of Grand
Bahama on the settlement, completely overlooked the rights to share in
the gross receipts of the marina and use of six slips in the docking space,
reserved to Five Wheels of Grand Bahama in the original purchase from
that company, and the Montreal Trust Company had to settle an action
brought by Five Wheels of Grand Bahama after the collapse by sur-
rendering $100,000 worth of promissory notes to Aurora Leasing made
by Five Wheels, and 240,000 of its shares owned by Associated Cana-
dian Holdings.
Atlantic Acceptance in Receivership Finally Acquires Control
Indeed, had it not been for the Atlantic collapse, Commodore Sales
Acceptance would have been the real loser as a result of all these
manoeuvres, and the displacement of the Manus brothers from control
of a majority shareholding in the Lucayan Beach Hotel and Development
company as far away as ever without further expenditure of Atlantic
funds. As it was, it was left to the receiver and manager to perform the
task of removing them which, animated by the conviction that amidst
all the wreckage one real asset could be salvaged for the creditors, it
did with resolution. The way in which this was done, and the extent to
which an additional investment by Atlantic Acceptance was necessary
564
Chapter IX
to acquire 9,398,650 shares out of the total 10,000,000 issued and out-
standing, is illustrated by the following schedule:1
Quantity Paid by
of Montreal
Shares Trust
Shares apparently in possession of Commodore Sales
Acceptance as of June 17, 1965 and subsequently
taken over by Montreal Trust as Receivable of
Atlantic Acceptance:
Shares registered to Barrett-Goodfellow but benefi-
cially owned by Daylite of Grand Bahama who
pledged them with Commodore Sales Acceptance to
secure indebtedness of Dalite (Canada) to Com-
modore Sales Acceptance 647,500
Pledged to Commodore Sales Acceptance to secure
indebtedness to Dalite (Canada) to Commodore
Sales Acceptance registered holders as follows:
Martin Fruitman 2,000
Ruth Levinson 2,170
Albert M. Lando 2,000
B. L. McFadden 2,000
Harry Wagman 3,500
11,670 old 29,175
Shares or escrow deposits registered to Gee & Co.
but beneficially owned by Freeport International.
Freeport had pledged them with Aurora to secure
their loan with Aurora. Freeport's loan and pledged
shares were assigned to Commodore Sales Accep-
tance to secure indebtedness of Aurora to Com-
modore Sales Acceptance 1,250,000
Shares or escrow deposits beneficially owned by
Dallas Holdings who had pledged them with Aurora
to secure their loan with Aurora. Aurora had
assigned the Dallas loan and the pledged shares to
Commodore Sales Acceptance as security for in-
debtedness of Aurora to Commodore Sales Accep-
tance. Shares or escrow deposits were registered as
follows:
Dallas 7,000 old (shares)
Gee & Co 20,000 old (escrow deposits)
27,000 old 67,500
Total shares or escrow deposit certificates taken over
from Commodore Sales Acceptance 1,994,175
Add:
Shares taken into custody by Montreal Trust Co.
Registered to Daylite of Grand Bahama 7,500
Registered to Valley Farm and Enterprises 5,000
Re-purchased from Hugo Oppenheim & Sohn by
cancelling debt to Commodore Sales Acceptance.
The stock power of attorney executed by the
German bank for the purpose of effecting registra-
tion of the shares to Montreal Trust was signed by
Jack Tramiel as chairman of the board 1,250,000
Sub-total — total shares physically taken into posses-
sion by Montreal Trust Co. without incurring any
further cash outlay 3,256,675
Exhibit 2643.
565
Lucayan Beach and Dalite
Quantity Paid by
of Montreal
Shares Trust
Purchased from Allen S. Manus and Cecil Manus
pursuant to an agreement dated July 7, 1965 at 60<?
U.S. per share 4,332,395 $2,820,389
Purchase price includes provision for transfer to
Montreal Trust by Cecil Manus of 2nd mortgage
debenture of Lucayan Beach Hotel in the amount
of $1,250,000
Purchased from sundry shareholders at 60tf per share 559,580 362,825
Acquisition of shares (1,250,000) by paying off
$250,000 loan (plus interest from March 4, 1964 to
July 30, 1965) which Mr. C. P. Morgan had with
Sassoon against which C. P. Morgan had pledged
the shares as collateral 1,250,000 274,599
Total shares obtained by Montreal Trust 9,398,650 $3,457,813
Number of shares still in hands of sundry other
shareholders 601,350
Total shares issued and outstanding 10,000,000
On July 7, 1965 J. K. Allison, a vice-president of the Montreal Trust
Company, was elected a director of the Lucayan Beach Hotel and De-
velopment company, and on July 21 Allen and Cecil Manus, Alexis
Obolensky, Milton E. Mermelstein and S. T. Lesser were replaced as
directors by Messrs. Rowe, Kerlin, Gaffney and Biddell, the last being
president of the Clarkson Company Limited. The three Sassoon directors,
elected May 6, remained in office. The work of this board is summarized
in a report of the directors to the shareholders of the company, and cir-
culated to the noteholders of Atlantic Acceptance, which is as follows:2
"THE LUCAYAN BEACH HOTEL & DEVELOPMENT LIMITED
REPORT OF THE DIRECTORS TO SHAREHOLDERS
The Lucayan Beach Hotel was opened in January, 1964 and as shown
by the Financial report dated September 30, 1965 the hotel company
has incurred losses as shown therein to that date. During much of the
intervening period the hotel properties were leased to a number of
different management companies and the operating losses are a combina-
tion of the losses incurred while the properties were being operated by
the company itself and arising out of the various lease agreements. The
most recent of the agreements, that with L.B.H. Management Company
Limited, was terminated on September 30, 1965.
It will be noted that the Company's auditors have been unable to
express an opinion on the financial statements at September 30, 1965 or
on the results of the operations of the Company for the period ending on
that date. The present Directors of the Company, most of whom are
fairly recent appointees, are similarly not in a position to express any
opinion on the results of past operations. The Directors are satisfied that
the Balance Sheet at September 30, 1965 fairly reflects the financial
•Exhibit 2916.
566
Chapter IX
position of the Company at that date subject to it being difficult to
accurately describe the basis of the valuation of the Company's land,
buildings and equipment. Appraisals of the Company's properties and
a complete inventory of its equipment and furniture are now in progress
and it may be that on the completion of this work the Directors will
decide on some different value at which to reflect the Company's invest-
ment in its physical properties in its accounts.
In July of this year a number of new Directors joined the Board
replacing Mr. Allen S. Manus and his nominees. The new Directors
represent Montreal Trust Company in its capacity as Receiver and
Manager of Atlantic Acceptance Corporation Limited. At the date of its
Receivership, Atlantic Acceptance Corporation Limited through its sub-
sidiary and associated companies owned a minority share interest in
Lucayan Beach Hotel & Development Limited. Since that date the
Receiver and Manager has substantially increased this investment
through the acquisition of additional shares and all of the outstanding
floating charge debentures.
Since July the Receiver and Manager has made substantial loans to
the Company to permit it to pay arrears of interest on the mortgages, to
bring the accounts of creditors into a current position and to finance a
program of rehabilitation and improvement in the hotel's physical facil-
ities. These loans have been secured by the issue to the Receiver and
Manager of a collateral floating charge debenture in the amount of U.S.
$4,000,000. to be held to secure the balance of the loans which may be
outstanding from time to time.
When the Receiver and Manager took over the Atlantic investment
in the Company, a number of transactions were in process to acquire the
Bell Channel Villas, the Lucayan marina and the Lucayan apartments.
All of these transactions have now been completed and the Company or
its wholly owned subsidiaries have clear title to all of these properties
subject only to the mortgage liabilities reflected on the balance sheet at
September 30, 1965.
Arrangements have been made to refinance the first mortgage on the
hotel properties which falls due on January 18, 1966. All of the out-
standing floating charge debentures are held by the Receiver and Man-
ager which is continuing to advance funds as they are required to place
the hotel complex in first class physical condition.
Effective October 1, 1965 the Company has agreed to lease all of the
hotel, motel, marina and apartment properties to a company formed by
Messrs. J. Crothers and H. Keenan. The lease is to run for a period of
five years with the hotel company receiving as its rent a substantial
share of profits earned during its term. The Directors look forward with
confidence to the successful operation of the hotel properties in the
hands of the new lessees.
Respectfully submitted,
'J. K. Allison'
Vice-President"
Montreal, Canada
December 14th, 1965
567
Lucayan Beach and Dalite
The creditors in effect own over 90% of the Hotel Company's
shares and the amount of the ultimate loss turns on the price that these
shares will command in the future. The financial statements of the Hotel
Company for the period January 1 to September 30, 1966, prepared and
accompanied by a qualified report by Price, Waterhouse & Co., show a
loss for the period of $1,333,254 to be added to a deficit at the begin-
ning of the period of $684,667. This loss includes "special repairs and
maintenance required to bring facilities to a first-class standard" of
$379,552; note 1 to the statements states that further necessary expendi-
tures of this nature are estimated at $130,000. It is further noted that
the audited financial statements of the hotel operating company (Messrs.
Crothers & Keenan) for the year ended September 30, 1966 disclosed
a loss of $516,981, and under the terms of the lease $500,000 of this
loss was to be defrayed in terms of a subsidy from the Hotel Company.3
A recent analysis of published financial statements of the Hotel
Company shows that accumulated net losses on operations as at Septem-
ber 30, 1967 amounted to $3,805,452. The reported deficit, however,
was $2,741,290, reflecting the writing off of $1,064,162 against a capital
reserve arising on valuation of land.4 This reserve was created on June
10, 1965, or only just before the Atlantic collapse, as a result of a de-
cision taken at a shareholders' meeting, by recording, as "directors' valua-
tion of land", an amount of $2,500,000, of which $2,000,000 was
attributed to the value of the land on which the hotel was built and
$500,000 to that which contained the marina, apartments and efficiency
units. No independent appraisal of land values was made and the action
taken would appear to have been inspired by the need to write off the
sum of $ 1 ,064, 1 62 which was the exact amount of the loss from hotel
operations from February 1, 1964 to February 28, 1965. Clearly, con-
siderable time and careful management are required to make the hotel
enterprise attractive to potential purchasers for the very large price
required to liquidate Atlantic's investment, both before and after the
date of receivership.
In January 1966 the first mortgage debt payable to the Grand
Bahama Development Company in the amount of $4,000,000 became
due and payable and, since the loan carried an interest rate of 8%, the
receiver and manager decided to repay it out of receivership funds,
"rather than to enter into negotiations with potential lenders in a tight
money market." It now stands in the place of the Development Com-
pany as first mortgagee. One paragraph of the report of the Montreal
Trust Company, signed by Mr. J. G. Haxton, and dated August 15,
1967, may fairly be quoted in concluding this section of the narrative:5
"It should be clear to noteholders in the first instance that there can
be no justification of any part of Atlantic's original commitment as a
"Exhibit 4914.
'Exhibit 4956.
sExhibit 4913.
568
Chapter IX
normal business risk of a sales finance company. The late President of
the Company, Mr. C. Powell Morgan, in explaining to the Receiver
and Manager the nature and amount of the involvement of Atlantic
in the hotel company characterized his venture as a potential "big
win" which would help recover some of the other losses which be-
came apparent after the date of receivership. One loan of $500,000
actually represented an advance to L. B. H. Management Company
Limited, a company personally incorporated by Mr. Morgan which con-
tracted to manage the hotel, the loan representing a payment of one
year's rent in advance. About $4,600,000 had been loaned to the con-
tracting company which built the villas and marina, the second phase of
the hotel complex, which were just being completed at the date of
receivership. The contracting company became insolvent and was sub-
sequently put in liquidation. Two large amounts had been loaned to
companies to acquire shares of the hotel company, one amount of
$1,250,000 secured by 1,250,000 of the shares of the hotel company
and another amount of $3,750,000, ostensibly to a Berlin bank, secured
by 1,250,000 shares. The bank denied any knowledge of the transaction
and the Receiver and Manager had recourse only to the shares in its
possession. About 550,000 additional shares were acquired in the way
of seized collateral for other loans."
Concluding Reflections on Cost and Recovery
Shown overleaf is a schedule prepared by Mr. Burn entitled "Luca-
yan Beach Hotel and Development Limited — Analysis of Acquisition of
Assets from its Inception July 1963 to September 30, 1965".1 Every
acquisition, beginning on December 5, 1963 when the Lucayan Village
Company contracted with Daylite of Grand Bahama for the construction
of the motel, continuing to the last transactions effective on July 22,
1965, when the receiver and manager purchased additional and minor
works of Daylite of Grand Bahama and added $400,000 to the purchase
price of the marina and apartments to create an equitable settlement of
the advances made by that company to the Hotel Company, is listed by
date and cost. The total outlay of funds was $14,639,258, but added to
it is an amount of $2,500,000, shown as "directors' valuation of land"
and referred to in the preceding section. The money value for the
acquisition of the motel and additional acquisitions afterwards was
$8,203,939, and of the marina and apartments after the adjustment in
favour of Daylite of Grand Bahama, $4,910,000. A total valuation of
fixed assets arrived at after the collapse of Atlantic, and shown on the un-
audited balance sheet as at September 30, 1965, is $17,139,258, includ-
ing the "directors' valuation" of the land. It has been seen that money
originating with Atlantic Acceptance found its way to Grand Bahama
Island in connection with the Lucayan projects in the amount of $11,-
325,149 plus accrued interest in the minimum amount of $500,000. It is
Exhibit 2915.
569
Lucayan Beach and Dalite
impossible to estimate the ultimate loss to the company because, as has
been noticed in Chapter IV, of the additional investment made by the
receiver and manager on a very large scale, referred to by Mr. Allison
in general terms in his report, and the uncertain future of the operation
of the hotel and its appurtenances by new management. No doubt a
great deal depends upon political developments in the Bahama Islands
LUCAYAN BEACH HOTEL AND DEVELOPMENT LIMITED
Analysis of Acquisition of Assets
From Inception July, 1963 to September 30, 1965
Marina,
Apartments &
Efficiency
Total Hotel Units Motel
Dec. 5 03 The Lucayan Village Co. Ltd., wholly-owned by Hotel
Company contracts with Daylite of Grand Bahama to
build, equip and furnish a 150-room motel, convention
hall, service buildings and swimming pool. Contract
price: $1,350,000 $ 1,350,000 81.350,000
Jan. 18 04 Hotel Company purchases hotel from Grand Bahama
Development Company for contract price of $7,093, 4G2 7,693,462 $ 7,693,162
May 2G 04 Contribution to hotel assets by Daylite by way of issuing
notes to Grand Bahama Development Company in con-
sideration of release to Hotel Company 250,000 250,000
Apr. 12/65 Daylite sells to Hotel Company, marina, apartments and
efficiency units. Contract price: 13,880,000 3.S80.000 $3,880,000
JuK' 22/65 April 12th agreement re-negotiated by Montreal Trust to
$4,280,000 400,000 400,000
July 22/65 Agreement whereby Five Wheels releases Hotel Com-
pany of provision of 6 slips and payment of royalties
on marina operations 000,000 600,000
Julv 22 05 Purchase of additional assets from Daylite of Grand
Bahama 205,000 30,000 175.000
SUB-TOTALS $14,37S,462 $ 7,943,462 $4,910,000 $1,525,000
Additional purchases subsequent to acquisition — per records of Hotel
Company
— floating docks, tennis court and clubhouse 34,369 34,369
—furniture and fixtures 114,688 114,688
— electrical and mechanical 89,218 89,218
— motor vehicles 30,552 30,552
—yacht 4,000 4,000
-sundry, to adjust (12,031) (12,350) 319
TOTAL ACQUISITIONS INVOLVING OUTLAY OF
FUND8 $14,639,258 $ 8,203,939 $4,910,000 $1,525,319
Land brought into records at "Directors' valuation" 2,500,000 2,000,000 500,000
Apparent error in accounting allocation 145,804 (145,804)
TOTAL FIXED ASSETS PER UNAUDITED
BALANCE SHEET AS AT SEPTEMBER 30, 1965 $17,139,258 $10,349,743 $5,264,196 $1,525,319
570
Chapter IX
in the future; particularly on the extent to which the report of the Com-
mission of Inquiry in relation to gambling is implemented and the visit-
ing tourist is assured that his indulgence in this is not contributing to the
coffers of Cosa Nostra. The big and possibly only winners were the
Manus brothers. It is difficult to say what they would have lost had they
not been rescued by the Montreal Trust Company, since it is virtually
impossible to identify any real investment that was made with their own
funds. Before the collapse Allen Manus, according to Louis Chesler,
said that he was the owner of 44%, or 4,400,000 shares of the issued
stock of the Hotel Company, without cost to himself and had made an
additional $340,000. On the settlement with the Montreal Trust Com-
pany he and his brother received 60^ per share for 4,332,395 shares, or
$2,820,389 in U.S. funds, for which Cecil Manus also surrendered his
second mortgage debenture, and Allen Manus is reported to have even
been given the yacht and six-passenger aircraft belonging to the Hotel
Company and the specially commissioned furniture of his apartment. It
is generally to be hoped, now that the Lucayan Beach Hotel is in the
hands of honest men, that the creditors of Atlantic Acceptance will be
rewarded by what must be fairly described as a courageous investment,
made at a critical moment on their behalf and with their consent.
n
Dalite Corporation (Canada) Limited
Throughout the preceding pages of this chapter frequent reference
has been made to Dalite Corporation (Canada) Limited, and the com-
pany in which it held a half interest and through which it carried on its
operations on Grand Bahama Island, called Daylite of Grand Bahama
Limited. The activities of the latter were closely linked, as has been
seen, with those of the Lucayan Beach Hotel Company, and if one sets
aside the devices by which over $4,000,000 worth of the indebtedness
of Dalite Corporation to Commodore Sales Acceptance was transferred
to Hugo Oppenheim und Sohn and L.B.H. Management, and looks at
the reality of the situation, it will be seen that about 68% of the whole
involvement of Atlantic Acceptance Corporation and its group of com-
panies, in the sense of investment and unpaid loans at June 17, 1965,
was attributable to advances made to Dalite Corporation, and passed on
by it to Daylite of Grand Bahama in a manner which must be described
in detail. Moreover, long before the appearance of Allen Manus on the
Atlantic stage, Dalite Corporation had been a large borrower of Atlantic
funds, and this particular example of the application of C. P. Morgan's
theory of "secondary banking" must be studied first before the special
and peculiar features of the Grand Bahama enterprise are examined.
Dalite Corporation was the creation of Eugene Last who was born
in Edmonton, Alberta on May 14, 1915, according to the evidence which
571
Lucayan Beach and Dalite
he gave to the Commission in the course of two full days of testimony
taken on September 26 and 27, 1966.1 From 1920 to 1937 he lived in
Rumania and had to learn English on his return to Canada in that year.
During the last war he was employed by a Crown corporation in Lea-
side, Ontario, and afterwards, with his half-brother and brother-in-law,
started a woodworking shop which developed into Dalite Furniture &
Store Fixtures Company Limited, incorporated as a private company
in Ontario on May 30, 1951.2 Eugene Last owned all the stock and the
company carried on the business of making furniture and structural
panels designed by him.
For the expert evidence on the financial transaction of these com-
panies the Commission again relied on Mr. Bertrand Wolfman of P. S.
Ross & Partners whose evidence was given over a period of four days
immediately prior to that of Last himself.3 Messrs. B. W. McLoughlin
and H. B. Walker of Touche, Ross, Bailey & Smart, and R. W. Scott and
K. A. Alles of Clarkson, Gordon & Co. testified on many matters ancil-
lary to Dalite operations. During the early period of the company's
history, which is not material to the Commission's inquiry, until the end
of 1960, the directors were Eugene Last, his brother Victor Last and
his half-brother John Petrie, and after April 7, 1960 the name of the
company was changed by supplementary letters patent to Dalite Cor-
poration (Canada) Limited and the board was increased in number.
William R. Miller and Joseph Goldberg were elected on April 5, 1962
and Samuel J. Hogg on April 26. Miller resigned on October 15 of that
year; according to the minutes, his vacancy was filied on December 6 by
George H. Weinrott who, however, was not qualified to act since he
never owned a share of the company, and apparently did not continue
on the board although there is no record of his resignation. Joseph
Goldberg resigned on June 6, 1962, so that after October 15 of that year
the board of directors consisted, as before, of the two Lasts, Petrie and
Hogg. There are no minutes of the company's meetings available after
those of June 17, 1964 and no share records of the company have been
found, but returns made to the Provincial Secretary indicate the author-
ized preference shares amounted to 13,800, each with a par value of
$10, of which 6,700 were issued; of these 2,600 were redeemed during
1961. Of the 12,000 authorized common shares 6,030 were issued for
a total consideration of $6,003. The most important transfer of shares
in the company's history occurred on April 26, 1962, when Eugene Last,
who two weeks previously had warranted that he owned all the issued
shares of the company,4 transferred to Carl Solomon in trust 1,507
'Evidence Volumes 64-5.
''Exhibit 388.
"Evidence Volumes 60-3. pp. 8045-544.
'Exhibit 2939.1.
572
Chapter IX
common shares and 1,025 preference shares, which represented one-
quarter of the issued capital stock,5 and placed the remainder in escrow
for the benefit of Commodore Sales Acceptance.
Financing the Pre-fabricated Housing Venture
Last said that up until 1960 Dalite made "a lot of money", although
its profits were modest in fact, and during this time the company relied
on chartered bank financing, principally from the Imperial Bank of
Canada. By the end of the period Last was contemplating a large expan-
sion of its business for the production of prefabricated components in
the erection of houses which coincided with, if it was not inspired by,
the activities of the Department of Northern Affairs in developing per-
manent housing for Eskimos. One of Last's familiars was Joseph Gold-
berg who was interested in promoting the export of this product. Every-
thing depended on developing a prototype to satisfy the standards of
Central Mortgage & Housing Corporation in Canada and the Federal
Housing Authority in the United States, and for this substantial funds
were required. The banks were not prepared to make loans at this par-
ticular juncture, and early in 1961 Goldberg arranged an introduction
for Last with C. P. Morgan whom he first met in the latter's office at 100
Adelaide Street West in Toronto. Morgan was enthusiastic about the
Dalite product and agreed to finance research and development for tests
by government authorities in Canada and the United States, and the
production of some experimental units for erection by the Department
of Northern Affairs. At the end of Dalite's fiscal year at July 31, 1961
Commodore Sales Acceptance loans to it were in the order of $256,000.
By December 31, 1961 the books of Commodore Sales Acceptance
showed accounts receivable from Dalite Corporation at $346,132.94,
but a considerable change was in the offing. The minutes of a meeting
of the directors of the company dated February 21, 1962, under the
heading, "Arrangements with Commodore Sales Acceptance Limited",
set out the new arrangement whereby Commodore Sales Acceptance
became virtually the sole source of Dalite Corporation funds and the
terms on which they were to be lent.1
"Mr. Last reviewed the Company's financial position and stated that
from time to time the Company had obtained loans from Commodore
Sales Acceptance Limited to provide funds for the development of the
Company's products and that, subject to the approval of the Board and
of the shareholders of the Company, arrangements had been made for a
further loan to enable the Company to pay off its indebtedness to the
Canadian Imperial Bank of Commerce amounting to approximately
'Exhibit 232.
Exhibit 232.
573
Lucayan Beach and Dalite
Two Hundred and Ten Thousand Dollars ($210,000.00) and to provide
working capital. He advised that the Company's indebtedness to Com-
modore was Three Hundred and Sixty-Nine Thousand Dollars ($369,-
000.00) and proposed that it be secured by a First Floating Charge
Debenture for that amount and that authority be given to obtain a loan
of up to Six Hundred and Thirty-One Thousand Dollars ($631,000.00)
to be secured by a further Floating Charge Debenture ranking pari
passu with the Three Hundred and Sixty-Nine Thousand Dollars
($369,000.00) Debenture."
The minute goes on to record the appointment of the Bank of Montreal
as the company's banker in place of the Canadian Imperial Bank of
Commerce, the loan from which had been repaid, and refers in the
following terms to the characteristic factoring arrangement adopted by
Commodore Sales Acceptance:
"Mr. Last stated that he had arranged with the Bank of Montreal,
Brown's Line and Evans Avenue Branch, to maintain an account known
as the 'Dalite Transfer Account' in which all receivables would be
deposited and the bank had been instructed to transfer the funds on
deposit in such account to The Bank of Nova Scotia, Toronto Branch,
for deposit to the Company's 'Transfer Account' maintained with that
bank. He also stated that similar arrangements had been made with The
Bank of Nova Scotia, Toronto Branch, to accept for deposit to the credit
of the Company's 'Transfer Account' with it, funds transferred from the
Company's 'Transfer Account' with the Bank of Montreal. Approval of
the Board was given to the foregoing arrangements made by the
President.
The Board also approved the instructions given by the President to
The Bank of Nova Scotia to transfer all sums received by it for deposit
in the Company's 'Transfer Account' to the account maintained with
The Bank of Nova Scotia by Commodore Sales Acceptance Limited."
At the same meeting Eugene Last undertook to lend the company
$100,000 in exchange for a promissory note convertible into 5,970
common shares, at his option, for four years at 10% per annum. The
money to make this advance was secured on the Dalite plant at 300
Dwight Avenue, occupied before the move to 75 Brown's Line and
owned by Eugene Last, by a mortgage to a company called Hilltop
Holdings Limited, an acquisition of W. L. Walton's, which in turn
borrowed the money from Commodore Sales Acceptance after assigning
the mortgage, and did not pay it back.
The debentures referred to are dated March 1, 1962, and in the
following month Commodore Sales Acceptance tightened its hold on
the situation. According to Dalite minutes of April 26, an agreement
was concluded between the company and Eugene Last on the one hand,
and Commodore Sales Acceptance on the other, whereby Last would
574
Chapter IX
deposit 4,523 common shares and 3,075 preference shares in transfer-
able form with the Canada Permanent Toronto General Trust Company
as security against default until the two debentures were discharged.
These shareholdings represented 75% of Dalite's issued capital stock
and the deposit was made with the trust company, together with the
resignations of Eugene and Victor Last, Samuel J. Hogg, William Miller
and Joseph Goldberg, who were all the directors elected at a special
shareholders' meeting on April 5, as a result of the enlargement of the
board. Although the debentures subsequently went into default, Com-
modore Sales Acceptance took no action, and the Commission was ad-
vised by the trust company on September 15, 19662 that the shares, duly
endorsed, were still held, together with the resignations, and that no
notice of either payment or default in relation to the debentures had
ever been received from their holder.
C. P. Morgan's 25% of Dalite Corporation
The minutes for April 26 also record, without comment or explana-
tion, the transfer of shares mentioned above to Carl Solomon in trust.
Last's recollection was that about a month prior to April 26 Morgan,
in his enthusiasm about the prospects of Dalite Corporation, asked him
if he could have stock in the company. As Last said, "Him being in the
high finance I found him very reputable. I felt he should have part of
it. He could only be of benefit to the company if nothing else. So I gave
him 25% of the company". This discussion took place, according to
Last, in Morgan's office, and there was a further meeting in the office of
Norman O. Seagram, Q.C. of Messrs. Roberts, Archibald, Seagram &
Cole, the company's solicitors, at which discussions and instructions were
given to draw the debentures in favour of Commodore Sales Acceptance.
Last's evidence, given in response to Mr. Shepherd's questions about
Morgan's interest, was as follows:1
"Q. And how did the question of Mr. Morgan's 25 percent interest
come up again?
A. I just instructed Mr. Seagram to issue 25 per cent of the stock.
Q. Was it issued to Mr. Morgan in his own name?
A. No, it wasn't. It was issued into Carl Solomon in trust.
Q. Whose idea was it to put it in the name of somebody other than Mr.
Morgan?
A. Mr. Morgan suggested it.
Q. What had the interest rate payable by Dalite to Commodore Sales
been prior to this discussion about debenture and stock?
A. 15 per cent — as he put it, VA per month.
'Exhibit 3069.
Evidence Volume 64, pp. 8555-60.
575
Lucayan Beach and Dalite
Q. Did the interest rate payable to Commodore Sales change at this
time?
A. Right after the issuance of debenture, Mr. Morgan reduced the rate
of interest to 10 per cent.
Q. Then what happened to your 75 per cent interest?
A. My 75 per cent interest was deposited in escrow with Canada
Permanent.
Q. For the benefit of whom?
A. For the benefit of debenture holder.
Q. Commodore Sales?
A. Right.
Q. Mr. Morgan's 25 per cent was not deposited?
A. No.
Q. Do I understand Mr. Morgan's 25 per cent was personal to him?
That is, he was the owner beneficially of that 25 per cent?
A. Right.
Q. And your 75 per cent was owned by you, but it was subject —
A. To debenture.
Q. I would like to consider with you the position in which Mr. Morgan
has now placed himself. Am I right in saying Mr. Morgan was president
of Commodore Sales which had loaned substantial sums to Dalite
(Canada) on terms whereby Commodore Sales could demand payment
if they wanted to?
A. Right.
Q. If the Commodore Sales demanded payment right then and there,
Dalite would have a great deal of difficulty paying it?
A. Actually that is correct. Right after the debenture was issued, they
put their own man as a signing officer of cheques, a counter-signing
officer, and if when the interest rate was due and we issued a cheque
and they didn't want to pay or sign, we could have been bankrupt right
there.
Q. Just prior to that debenture. Commodore Sales was a creditor on
terms whereby Commodore Sales could demand payment and if Com-
modore Sales demanded payment, Dalite was going to be financially
embarrassed?
A. Right.
Q. And in these circumstances, as I understand this evidence, Mr. Mor-
gan, the president of Commodore Sales, asked you to give him an inter-
est in the company which was determined at 25 per cent and you did
give it to him?
A. Right.
576
Chapter IX
Q. But he did not take that stock in his own name, he took it in the
name of a nominee?
A. His attorney.
Q. And substantially contemporaneous with this, the interest rate pay-
able to Commodore Sales dropped from 15 per cent to 10 per cent?
A. Right.
Q. Of course, you knew what it was that Mr. Morgan had done because
he had to arrange it with you?
A. Yes.
Q. And he knew you knew?
A. Right.
Q. Who else knew between the time this was done and the time that
Atlantic collapsed?
A. My lawyer knew, Mr. Seagram.
Q. And Mr. Solomon knew?
A. Yes.
Q. Did Mr. Hogg?
A. Mr. Hogg knew.
Q. Mr. Thomson?
A. He knew about it.
Q. They were all Dalite people?
A. Yes. All the top personnel knew about it.
Q. Can you state of your own knowledge whether Mr. Manus knew
about it?
A. I couldn't say because I don't know if Mr. Morgan — it was never
mentioned in front of me.
Q. In any event, you didn't tell him?
A. No.
Q. Were any other of the persons ultimately concerned with the
Bahamas development aware of Mr. Morgan's interest so far as you
know of your own knowledge, having told them or having heard it told?
A. I think there was a comment made by Manus once to me that Mr.
Morgan had an interest, but it was never stated what percentage or
anything.
Q. Did Mr. Wagman know about it?
A. Yes, I am sure he knew about it.
Q. Mr. Walton?
A. Mr. Walton knew about it.
577
Lucayan Beach and Dalite
Q. Why do you say so? Were there conversations to that effect?
A. No. They were the accountants of the company.
Q. Can you think of anyone else who was aware that Mr. Morgan was,
through a nominee, an owner of Dalite?
A. Mr. Glick knew about it. He was the company accountant.
Q. Were you asked to keep this matter in confidence by Mr. Morgan?
A. No.
Q. Nothing was said about that?
A. No.
Q. But you did keep it in confidence other than to the persons you have
named?
A. Yes."
The interest rate referred to remained at 10% thereafter, and it will be
seen that three years later, before the Atlantic collapse, Morgan did divest
himself of these shares as part of a projected final settlement of the Dalite
problem, and when Dalite had been shown repeatedly and finally to be
an unprofitable enterprise. However, the situation was very different in
1962, and Morgan should be heard on this subject himself. The question
was raised by Mr. Shepherd in the course of making inquiries about the
role of David Rush.2
"MR. SHEPHERD: I would like to return to the role of Mr. Manus in
a moment. Just before we broke for lunch you said that Mr. David
Rush appeared to believe that he would have no difficulty in extending
his option on Analogue shares beyond the end of December, 1964. Did
Mr. Rush ever indicate to you that he believed you would grant him
some special consideration in respect to this matter or indeed in respect
to any matter?
A. He did.
Q. What conversations took place?
A. Well, he indicated to me that if I did not go along with the extension
that in his position in the newspaper world he could make things a little
hot for me. He was at that time connected with the News Observer.
Q. What information did he claim to have which he thought would be
embarrassing to you?
A. Just general knowledge of some of the weaker loans that had been
made by Commodore Sales. I mean particularly the ones to Racan
and also Dalite Corporation.
Q. Did he have any knowledge that you owned 25 per cent of Dalite
Corporation?
'Evidence Volume 26, pp. 3470-2.
578
Chapter IX
A. I didn't own 25 per cent of Dalite. It was pledged to Commodore
Sales Acceptance. He may have got some information that he thought
I owned 25 per cent of Dalite from that chap whose father was con-
nected with the Bank of Nova Scotia. I cannot recall his name. It will
come to me in a minute.
Q. Did Mr. Rush suggest as much, that he had such information?
A. Yes, he suggested he had certain information which would indicate
that I was a principal in Dalite, which I never was.
Q. Did these representations to you by Mr. Rush take place on one
occasion or on more than one?
A. They took place on several occasions.
Q. What answer did you make?
A. Well, I gave him as evasive an answer as I could. In other words,
I just stalled on the situation."
The evidence contradicting the assertion that Morgan held 25% of the
Dalite stock as a trustee for Commodore Sales Acceptance is overwhelm-
ing. It may be illustrated first by a document dated November 1, 1962,
an original document bearing Morgan's signature in the following terms:3
"TO: Dalite Corporation (Canada) Limited,
75 Brown's Line,
Toronto 14, Ontario.
I, C. POWELL MORGAN, the beneficial owner of shares of Dalite
Corporation (Canada) Limited held by Carl M. Solomon, in trust,
hereby consent to the appointment of GLICK AND LEVINE as audi-
tors of the Company to replace Walton, Wagman & Co.
DATED this 1st day of November, 1962.
'C. Powell Morgan' "
If one adds to this the reflection that nothing would have been easier
than to have put all the stock of Dalite Corporation in escrow with the
trust company and thus give Commodore Sales Acceptance even greater
security for its loans, there can be no doubt that C. P. Morgan neither
held nor intended to hold the 25% put in the name of Carl Solomon in
trust for any other purpose than his own use and ultimate personal
participation in the profits of the enterprise. There is no reference of
any kind in any working paper of any of the accountants, nor in the files
of the company, Solomon & Singer, C. P. Morgan or Commodore Sales
Acceptance, to the last-named being in turn a beneficiary of Morgan's
holdings. There is nothing to this effect save his own assertion, and this
must be regarded as at best a rationalization of something that he felt
to be discreditable, and at worst a deliberate falsehood.
'Exhibits 1952 and 2845.
579
Lucayan Beach and Dalite
Early Operations of Dalite Corporation Financed by Atlantic
From the books1 and records of the company, the working papers
of the accountants Glick & Levine and Walton, Wagman & Co., the
files of its solicitors, and in particular a memorandum prepared for
Annett & Co. dated June 22, 1961, containing information provided in
contemplation of a public offering of shares which did not materialize,
a great deal of light can be thrown on its operations. It was Last's
practice to form associated rather than subsidiary companies, using the
name Dalite and with shares issued to himself and his nominees. Such a
one was Dalite Corporation (Manitoba) Limited, incorporated in Mani-
toba to purchase land for the erection of prefabricated houses in the
International Nickel company town of Thompson, the shares of which
were all owned, either actually or beneficially, by Eugene Last; another
was Dalite Company of Delaware Limited which, under an agreement
with Dalite Corporation, had a franchise for manufacturing Dalite build-
ings outside the United States and Canada. Daylite of Grand Bahama
Company Limited was an exception, in that Dalite Corporation held a
50% interest in its common stock. Dalite Corporation's first plant was
at 300 Dwight Avenue in New Toronto, on property owned by Eugene
Last and rented to the company2 for a term of ten years from December
1. 1955, at an annual rental of $33,600, payable monthly in the sum of
$2,800. Until Commodore Sales Acceptance began financing Dalite.
Last had forgiven the company $1,200 per month of the rental charged,
but, with Atlantic money assured, he appears to have recovered this gift
and from then on collected the full amount exigible under the lease. At
the end of January 1962 Dalite vacated these premises and moved to 75
Brown's Line, renting the new premises for $4,000 per month. After the
move Dalite none the less continued to pay rent for 300 Dwight Avenue
and sub-let part of the premises for $2,000 per month to Canada Motor
Products (Blackstone) Limited, thus incurring a loss of $800 per month.
This was another company financed by Commodore Sales Acceptance,
from which it borrowed the money to pay the rent. There is some
evidence to indicate that a larger part of the building than that occupied
by Canada Motor Products was used by Zeus Armature & Rewinding
Company Limited, although there is no record of its rental payments in
the Dalite books.
Throughout 1961 and the first half of 1962 the principal customer
of Dalite Corporation was the Department of Northern Affairs for which
it manufactured prefabricated housing, but the importance of the Depart-
ment's purchases declined thereafter, as did the activities of Dalite's
furniture and wall panel division. During the second half of 1962, and
with massive support from Commodore Sales Acceptance, it began to
'Exhibits 3076-80.
•"Exhibit 2937.1.
580
Chapter IX
manufacture a more elaborate prefabricated housing for the develop-
ment at Thompson, Manitoba which proved to be a costly failure, and
the company's final fling was taken on the island of Grand Bahama, sup-
plying prefabricated housing to Daylite of Grand Bahama for erection as
already generally described. An analysis of the revenues of the com-
pany3 for the years ended July 31, 1960, July 31, 1961 and July 31,
1962, through a five-month period ended December 31, 1962, the years
ended December 31, 1963 and 1964 and an eight-month period ended
August 31, 1965, which coincided with the date of the company's bank-
ruptcy, provides a significant illustration. It shows that in 1960 Dalite
was primarily a furniture company, but in 1961 out of total sales of
$1,068,678, $400,000 was realized in housing sales, mostly to the
Department of Northern Affairs. During 1962 the Department con-
tinued to buy, but it was not a large element in total sales amounting to
$1,239,287 at July 31. Then in the five months ending December 31,
1962 just under 50% of all the sales are those of prefabricated housing
in Thompson, Manitoba. In 1963 the Department of Northern Affairs
again became a substantial customer, and some $240,000 in sales were
made to the Grand Bahama project out of a total of $1,709,217. In
1964 the picture changed completely, and out of total sales of $8,678,-
989, $7,544,632 were to Daylite of Grand Bahama. For the eight-month
period ended August 31, 1965 sales in the amount of $3,814,890, re-
corded in the books of the company consisted of duplicated and other-
wise unjustifiable billings, and the Department of Northern Affairs was
once again responsible for over half of the genuine sales; but over the
whole six-year period, even eliminating the suspect sales, the Grand
Bahama projects accounted for 49.2%, the Department of Northern
Affairs contracts for 15.6% and the wall panel and furniture divisions
for 17% of a total of $15,825,282 of regularly concluded sales.
Financial Record and Atlantic Loans
Financial statements of Dalite Corporation, beginning with the
year ended July 31, 1960, through to December 31, 1964 including that
of the five-month period from August 1 to December 31, 1962 and the
eight-month period from January 1 to August 30, 1965, provide the
basis of a schedule entitled "Dalite Condensed Balance Sheets and In-
come Statements July 31, 1960 to August 31, 1965" (Table 47), *
which must be considered in conjunction with another headed "Com-
parative Adjusted Earnings Statement — 1960 to 1965" (Table 48).-
The last full year of operation in which Dalite had no loans from At-
lantic Acceptance was the period ended July 31, 1960. The aggregate
sales were $886,701 and the cost of sales approximately $785,000: the
'Exhibit 3073.
'Exhibit 3074.
'Exhibit 3075.
581
Lucayan Beach and Dalite
net result was a $5,000 loss after taking depreciation of $10,000. This
was typical of the progress of the company to that point and generally
speaking it was able to hold its own. In 1961 the sales increased
modestly to $1,068,000; after again taking $10,000 in depreciation
the company reported a net profit of $3,361. The first loans from Com-
modore Sales Acceptance were made in February 1961 and the fiscal
year ended on July 31. Inventory by that date had, however, risen from
$321,000 at the beginning of the year to $587,000 and the auditors,
Glick & Levine, qualified their report in respect of merchandise inven-
tory by saying that they had not personally examined the assets and that
the inventory sheets lacked detail, but that Eugene Last had signed a
certificate in respect of a figure of $587,857.79 or more than 50% of
the assets. The total outstanding loans from Commodore Sales Accept-
ance were then $256,025. There was also at this time a bank loan of
$182,877 secured by an assignment of accounts receivable and inven-
tory, so that during this period Commodore Sales Acceptance had no
preferred security. It has been seen how this was corrected early in
1962 by the issue of debentures to Commodore Sales Acceptance in the
aggregate amount of $1,000,000, and the paying off of the bank loan
with funds borrowed from it, but Atlantic loans soon outstripped any
reasonable standard of what was appropriate or safe in terms of the
published financial statements. At July 31, 1962, the end of the first
full year in which Atlantic financing was available to Dalite, these loans
had risen to $786,843, which was 129.4% of total tangible assets
reported and 62.4% of the total liabilities. It may be convenient to set
down here an analysis of Atlantic financing of Dalite Corporation on this
basis from the situation at July 31, 1960 to the date of bankruptcy:3
The Atlantic Group
Tangible % of % of
Assets Total Total Total
Reported Liabilities Loans Assets Liabilities
July 31, 1960 $ 593,831 $ 406,181 — 0.% 0.%
July 31, 1961 1,038,800 921,696 $ 256,025 24.6 27.8
July 31, 1962 607,783 1,260,098 786,843 129.4 62.4
December 31, 1962 1,085,881(1) 2,172,091 1,621,438 149.3 74.7
December 31, 1963 1,584.892(2) 2,885,311 2,237,381 141.1 77.5
December 31, 1964 7,669,587 8,222,053 7,505,828 97.8 91.3
August 31, 1965 3,575,090(3) 5,352,594 4,532,352 126.8 84.6
(1) Adjusted for over-billing to Dalite (Manitoba) of $141,500.
(2) Adjusted for $561,000 gain on sale of Cerametal Industries' assets.
(3) Adjusted for disputed billings of $3,815,000.
It will be noted that the figures for July 31, 1962 which produce
these ratios show a decline in tangible assets from $1,038,000 as at July
31, 1961 to $607,783. This reduction is connected with the qualifica-
"Exhibit 3082.
582
Chapter IX
tion of the report made by Glick & Levine in respect of the valuation of
inventory on the statement for July 31, 1961 which produced an inquiry
from W. L. Walton on behalf of C. P. Morgan.4 No written explanation
of this was given or exists, but in the next financial statement, prepared
by Walton, Wagman & Co., Dalite was reported to have suffered a loss
at July 31, 1962 of $730,000, the inventory being reduced to $288,657
which is consistent with the position at July 31, 1960. Sales at July 31,
1961 were shown at $1,068,678 and at July 31, 1962, $1,239,287,
whereas cost of sales had risen from $823,401 to $1,660,327, producing
a deficit of $421,040 expressed in gross and, after adding other expenses,
a net loss of $730,184. This increase in the cost of sales figure invites
suspicion, and probably reflects adjustment of inventory arising from an
overstatement by Last at July 31, 1961, about which Glick & Levine
made the reservation referred to. Walton, Wagman & Co. in their turn
said they were unable to express an opinion on the fairness of the
financial statements at July 31, 1962, without referring to the inventory
at all. In fact neither Glick & Levine nor Walton, Wagman & Co. ever
expressed an unqualified opinion on the Dalite financial statements from
1960 onwards, and for the year ended July 31, 1962 Dalite had a capital
deficit in the order of $550,000. With Atlantic loans of over $786,000
outstanding, not to mention the $100,000 of Atlantic money advanced
to Hilltop Holdings for the mortgage on 300 D wight Avenue given by
Last and lent to him by the company, Dalite was insolvent. The imme-
diate result was that the company changed its year-end to December 3 1 ;
for the five-month period ending on that day in 1962 Glick & Levine
were again the auditors and as a result came into possession of the
information that C. P. Morgan was the beneficial owner of 25% of the
company's issued stock.
The Services of Dr. Keesing
Before leaving the accounts for the year ended July 31, 1962
reference must be made to an asset shown as prepaid sales promotion
and patents in the amount of $109,229. For the previous year the same
item is shown in the amount of $52,000, and Glick & Levine had received
a letter signed for Dalite by E. Last, dated January 25, 19621, explaining
that out of a total cost of $53,409.57 "for travelling and promotion and
publicity expenses incurred during the fiscal year ended July 31, 1961"
an amount of $52,000 was to be deferred, because the benefit of the
expenditures was to be realized subsequently through sales and recovery
of such expenses from another company to be formed. This company
appears from examination of other records to have been Dalite Com-
pany of Delaware, and the money to have been laid out on proposed
'Exhibit 2923.9.
Exhibit 2923.2.
583
Lucayan Beach and Dalite
ventures in Panama and Nigeria, where Last had hopes of finding a
market for prefabricated housing. Another letter from Last to Glick &
Levine, dated January 22, 1962, is as follows:2
"This is your authority to accept as a charge against my Advances
Account in the books of Dalite Corporation (Canada) Limited the
difference between the amounts advanced by Commodore Sales
Acceptance Limited to Dalite Corporation (Canada) Limited as stated
by them and the amounts actually deposited in the Company bank
account during the fiscal year ended July 31, 1961, amounting to
$21,833.11.
In addition, this is your authority to accept as a charge against my
Advances Account in the books of Dalite Corporation (Canada)
Limited, the amount of $7,000.00 which was advanced by Mr. Allen
Rosen to the company in September 1960 in addition to the $15,000.00
shown on the books of the company.
Out of the above funds I paid on behalf of Dalite during the fiscal
year ended July 31, 1961 the following amounts for which this is your
authority to accept as a credit to my account and as an expense to Dalite
on account of Promotion Expenses :
Basic Industries Investment Corp $10,000.00
Dr. John Maurice Keesing 9,000.00
U.S. exchange on above amounts at 4% 760.00
$19,76000*
Dr. Keesing was a New York lawyer, describing himself as an expert in
international law, trade and finance. He published a lengthy "curriculum
vita" (sic) which included the information that he was the observer at
the United Nations for the "Principality of Thomond." This must have
appealed strongly to Eugene Last who shared with Keesing the distinc-
tion of holding an honorary degree from Philathea College in London,
Ontario, an organization not officially recognized as an institution of
learning, but devoted to the business of issuing academic titles for vary-
ing consideration. It may have been Keesing who appointed Last a
general in the Maltese army, a title which he has used in Australia in
recent months after his departure from Canadian shores. In any event,
in the accountants' audit file was a bill from "International Law Con-
sultants" in New York, addressed to Dalite, for $5,025 "due to Dr.
John M. Keesing", expressed as being owing at June 1, 1961, to which
a note is attached reading: "This is for services rendered and expenses
incurred in the survey and preparation of foreign markets for the Dalite
aluminum housing program". This bill is initialled "E.L.", indicating
approval of payment. Then there is another bill on a plain piece of
paper with a typewritten heading, "Basic Industries Investment Corpora-
tion, Monrovia, Liberia", dated March 24, 1961, addressed to Dalite
Corporation "for expenses advanced for your account in conjunction
'Exhibit 2923.4.
584
Chapter IX
with the survey for and introduction of the Dalite prefabricated house
. . . $17,183.84." Below that is acknowledgment of partial payments
consisting of one for $10,000, one for $1,025 and four of $1,000 each,
making a total of $15,025. At the bottom of this bill is some original
typing which has been heavily scored out so that it cannot be read,
except that the initials "E.L." appear on it and some legible fragments
including the words "to be paid" and "John M. Keesing", followed by
the words "with the", and concluding with the word "statement." The
balance to be paid has also been scored out and the signature "E. Last"
appended.3 It will be observed that after the $10,000 said to have
been paid to Basic Industries is deducted from the total repayments
there is left the sum of $5,025, which is exactly the amount paid by
Dalite to Keesing, so that it appears that two bills were submitted in this
respect for only one amount owing. There is a third statement in the
form of a bill from Dr. John Maurice Keesing for $9,000, addressed to
Mr. E. Last, in care of Dalite Corporation, for "international trade advice
services" rendered between January 1 to July 31, 1961, and this is dated
January 2, 1961, which may be an error. This bill is also initialled
"E.L."4 As late as February 24, 1962, S. A. Glick, of Glick & Levine
is found writing to Last asking for a photostatic copy of the cheque paid
by him to Keesing in June 1960 for $10,000. The work done by
Keesing can hardly be taken more seriously than Keesing himself, but
he continued to send out bills at intervals and subsequently claimed
that Dalite owed him $16,000. What little is known about Basic Indus-
tries Investment indicates that it was a company for the affairs of which
Last assumed responsibility and which he in all likelihood created. The
excess of the amounts advanced to Dalite over what was actually de-
posited in the company bank account from Commodore Sales Accept-
ance during the fiscal year ended July 31, 1961, amounting to $21,-
833.11, was charged against Last's advance account, and of this he
obtained credit for $19,760, consisting of the $10,000 to Basic Industries
Investment, $9,000 to Keesing, and $760 for exchange on U.S. funds at
4% . The good faith of this transaction is seriously in doubt. Generally
speaking, this is the nature of the expenditure of $52,000 set up as a
deferred expense.
Glick & Levine prepared no audited financial statement for the
five-month period ended December 31, 1962, but merely a draft pre-
pared from the books of the company without an opinion.5 Cost of sales
were one-half of what they were in the previous year, as might be ex-
pected. Sales had dropped only slightly to $1,177,400 and there was an
apparent profit of $120,304. Accounts receivable from subsidiary or
associated companies appeared in the amount of $596,014, alleged to
3Exhibit 2923.6.
'Exhibit 2923.7.
'Exhibit 235.
585
Lucayan Beach and Dalite
be from Dalite Corporation (Manitoba). This amount was not accur-
ately stated and somewhat more than $140,000 of it represented bill-
ings in excess of the estimated cost to the company, after all mortgage
money had been advanced by the Bank of Nova Scotia through the
Chartered Trust Company. It was never paid and remained outstand-
ing at the date of the bankruptcy of Dalite Corporation. Payment was
received in the order of some $450,000 for which amount the Manitoba
company had mortgaged the Thompson properties to Dalite, and since
they were all sold shortly after the excessive billings were made, it was
evidently realized that the balance billed was unjustifiable. If a reserve
had been set up against the sum that Dalite (Manitoba) did not pay,
and if there had been no increase of the prepaid sales promotion and
patents item for deferment by some $400,000, which is equally unjustifi-
able, Dalite would have lost $423,000 during the period rather than ap-
pearing to make a profit of slightly over $120,000; the capital position
would have been deficient by $1,086,000 rather than the $433,870 shown
in the financial statement. It should be mentioned in passing that during
this period, specifically on September 21, 1962, W. R. Miller, the general
manager and a director of the company, resigned from its board of
directors in protest against the ownership of Dalite (Manitoba) by
Eugene Last rather than by the company itself.6 The letters embodying
Miller's resignation, addressed to both Dalite Corporation and Last
separately, are both signed by the latter and his fellow directors Hogg
and Victor Last as evidence of acknowledgment.
At December 31, 1962 Atlantic loans to Dalite Corporation had
reached the approximate figure of $1,620,000. The next financial state-
ment, which was for the year ended December 31, 1964, was once again
prepared by Walton, Wagman & Co. who again expressed no opinion as
to its fairness. The explanation for the third change of auditors must be
found in a letter dated June 11, 1963, addressed to Eugene Last as
president of Dalite, sent by registered mail and indicating that a copy had
been sent to C. P. Morgan. It read:7
"At our last meeting on June 7th, 1963, at your office, certain matters
were discussed with you. We cannot agree on the methods adopted by
your company.
We, therefore, hereby resign as company accountants and auditors
of Dalite Corporation (Canada) Limited effective immediately and do
not intend to complete the financial statements for the fiscal period
ended December 31, 1962 beyond the preliminary draft statements
now in your possession.
Yours very truly,
GLICK & LEVINE"
•Exhibit 2940.2 and 2940.3.
"Exhibit 2940.1.
586
Chapter IX
The Trials of Cansameric Industries Limited
By this time Glick & Levine had been able to observe a transaction
between Dalite and Cansameric Industries Limited for which they were
also auditors. Cansameric was a construction company in which the
principals were E. A. Brown and A. B. Drohan, engaged in the actual
erection of the Dalite houses in Thompson, Manitoba on thirty-nine
separate lots. By the autumn of 1962 it had acquired accounts receivable
from Dalite in substantial amounts for which it was unable to obtain
payment. The evidence of Drohan, Brown and their bookkeeper, D. M.
Leiterman,1 makes it abundantly clear that, although A. G. Woolfrey at
Commodore Sales Acceptance was represented by Eugene Last as the
stumbling-block to payment of its outstanding accounts, Cansameric was
only able to obtain satisfaction by making two payments of its own, one
on October 18, 1962 of $6,000 and one on January 23, 1963 of $16,-
703.12, by means of cheques made payable to cash for which it received
a promissory note on February 21, 1963 from Dalite Company of Dela-
ware in the total amount of $22,703.12. This amount was never paid
by the Delaware company, and the proceeds of the two cheques were
deposited in two separate bank accounts in Last's name. The funds were
used personally by him and partly expended on the operations of Dalite
Company of Delaware in the Republic of Panama. An examination of
the books of Dalite Company of Delaware indicates that $6,500 of this
money was paid to George H. Weinrott, and at least $5,200 remained in
Last's hands, or was paid for his benefit through a cheque made payable
to Lillian Casselton (alias Lillian Martin) , Last's secretary, in the amount
of $5,200 drawn on one of the company's bank accounts, operated by
him in his own name, with the Chase Manhattan Bank in Panama. This
account was the depository for $15,000 in U.S. funds derived from the
second payment made by Cansameric, the balance of $500 in U.S. funds
having been given to Last in cash.2 Cansameric, to put it bluntly, was
able to make these payments to Last, ostensibly by way of loan to the
Delaware company, by falsifying invoices to Dalite Corporation, as
Drohan said at Last's suggestion, and its officers thus became parties
to a fraud perpetrated on Commodore Sales Acceptance and Dalite Cor-
poration which had initially been a matter of simple extortion directed
against themselves. During 1962 Cansameric had also been making
payments to S. J. Hogg, the vice-president of Dalite Corporation, osten-
sibly for engineering work on the erection of the Dalite housing. Between
June 21 and September 24, 1962 these payments amounted in the
aggregate to $7,860, some $3,000 of which was acknowledged to have
been received by Hogg in the evidence which he gave before the Com-
mission.3 As a douceur it also installed a new furnace in Hogg's house,
Evidence Volume 105.
-"Exhibits 4123 and 4142.
'Exhibit 4144.
587
Lucayan Beach and Dalite
charging the expenditure to customer relations. Finally, in June 1963,
Dalite and Cansameric agreed to settle the latter's claim for upwards of
$52,000 in extras, taking in exchange Dalite inventory at Thompson
valued at over $5 8, 000. 4 This was by way of settlement of an action
brought by Cansameric against Dalite to recover the amount of its un-
paid accounts, and, as part of the settlement, Brown was employed by
Dalite at a salary of $1,000 per month and Drohan was introduced as
an intermediary between Pyle-National (Canada) Limited, an electrical
contractor, and Dalite, to which it was supplying goods for transmission
to Daylite of Grand Bahama at Lucayan Beach, securing for him com-
mission of 10% on all the goods supplied by Pyle-National to the Grand
Bahama project. This arrangement was confirmed by the evidence of
the president of Pyle-National, I. Y. Morrison, and its vice-president
A. J. Sherrard.5 The detailed accounting evidence of the Cansameric
Industries transaction was given to the Commission by Mr. A. R. James,6
and in connection with the arrangement between Dalite Corporation and
Pyle-National by Mr. H. B. Walker,7 both of Touche, Ross, Bailey &
Smart.
D.H.I. Limited and Count Mastino Delia Scala
Walton, Wagman & Co. continued to be the auditors for Dalite
Corporation, and, in the case of the statement for the year ended Decem-
ber 31, 1963, again expressed no opinion. Sales were shown at $1,-
709,217 and the net operating loss at $14,088. The liabilities included
a bank loan or overdraft of $67,036. The loans of Commodore Sales
Acceptance amounted to $1,985,619 and of Adelaide Acceptance to
$251,762. Although sales considerably exceeded those of the previous
five-month period, the results for 1963 compared unfavourably with
those for the whole of 1962. An additional ingredient of the Atlantic
loans was the $100,000 mortgage given by Eugene Last to Hilltop
Holdings, so that in the aggregate the amount of money on loan from the
Atlantic group to Dalite was some $2,400,000. The equity position was
shown as a positive figure of $112,921, but there was an increase of
$200,000 in the deferred expense item of prepaid sales promotion and
patents, made entirely without justification, and the amount of $566,000
shown as "investment in D.H.I. ", without which there would be a
deficiency of $1,300,419 as shown on Table 48.
D.H.I. Limited was an Ontario private company, incorporated in
1956 to acquire the business of Dominion Home Improvements Com-
pany owned by Mastino Delia Scala. Mr. K. A. Alles of Clarkson,
'Exhibit 4154.
"Evidence Volume 98.
"Evidence Volume 105.
'Evidence Volume 97.
588
Chapter IX
Gordon & Co. examined its books and records and his testimony was
given to the Commission on May 5, 1966.1 Immediately succeeding
him as a witness was Delia Scala himself,2 a man of mild demeanour and
evidently of superior education. He was born in Rumania and came to
Canada in 1953, becoming a salesman for a company manufacturing
extruded aluminum windows and, after a brief experience of the busi-
ness in which he became sales manager, he formed his own enterprise.
He envisaged a nation-wide organization supplying windows, wall panels,
tile and other domestic appurtenances such as kitchen cupboards, on the
greatest scale. It was clear from his evidence that he felt that Canada
was a country where hard work and enterprise would enable him to
build "from the ground up", but by temperament and training he appears
to have been too sanguine and too inexperienced for the highly competi-
tive business on which he had embarked. By the end of 1961, D.H.I.
Limited was indebted to Inter-Provincial Commercial Discount Corpora-
tion Limited, which was factoring its accounts receivable, in the amount
of $667,437; this company, by May 1962, had advanced an additional
$290,000 secured by debenture and its associated company, Inter-
Provincial Factors Company Limited, $60,000 similarly secured. The
evidence indicates that these companies planned to acquire a share
interest in D.H.I. Limited and that this plan was on the point of yield-
ing to one which would substitute a syndicate composed of R. Scolnick,
vice-president of Inter-Provincial Commercial Discount, and the familiar
Trio of Messrs. Morgan, Walton and Wagman. Yet on April 18, 1962
Inter-Provincial Factors actually acquired for $100,000 an 80% in-
terest in D.H.I. Limited, so that the total investment of the two Inter-
Provincial companies, including the debentures outstanding, then stood
at $450,000. By June Scolnick had retired from the scene and on the
27th of that month a sale was made to F. D. O'Connor, a law student
in the office of Bernard Burton, solicitor for D.H.I. Limited, who pur-
chased as trustee all of the issued common stock of D.H.I. Limited from
the two Inter-Provincial companies and Delia Scala by paying the sum
of $350,000 to the former and taking an assignment of the debentures
referred to. According to a letter dated July 5, 1962 to C. Powell
Morgan from Burton, O'Connor held his interest in trust for Morgan.3
The purchase price was paid by a cheque from Aurora Leasing Corpora-
tion to Burton for $350,000, dated July 3,4 and Aurora recorded the
transaction as a loan to "Bernard Burton — D.H.I. Limited note receiv-
able." No promissory note has been discovered and Aurora never re-
corded any interest in the shares of D.H.I. Limited. On the day of this
Evidence Volume 27.
2Evidence Volumes 27-8.
sExhibit 1929.
'Exhibit 1934.
589
Lucayan Beach and Dalite
payment Aurora had borrowed $325,000 from Commodore Sales
Acceptance. There is some evidence to show that Morgan told Delia
Scala that he proposed to transfer these shares in due course to some
company the identity of which he did not disclose. The shares remained
in the custody of Mr. Burton with the company's minute book, in spite
of his efforts to divest himself of their custody, until a year later when
Harry Wagman expressed disquiet at the lack of security for the Aurora
loan. Then Burton delivered them to Wagman after being told during
the interval, when he sought instructions unavailingly from Morgan, that
he was making a nuisance of himself. The D.H.I, minute book was, as
Burton said, still in "a state of vacuum." He subsequently got the shares
back from Wagman for the purpose of making up the minute book and
cancelling the shares, so that new ones could be issued in the name of
Morgan's nominee. Eventually Delia Scala told him that the shares were
to be issued in his name and these instructions were confirmed by
Morgan. Burton drew the minutes recording this issue, including one
share each to J. Canning and J. C. Laidlaw as nominees of Aurora
Leasing. None the less Delia Scala endorsed transfer forms so that the
shares were again negotiable, and on one occasion, when leaving for
Europe, he gave Burton instructions that in case of his death 80% of
the shares were to be transferred into the beneficial interest of C. P.
Morgan. The situation remained thus until the Clarkson Company
Limited took possession of the shares and the debentures, which were
in the name of F. D. O'Connor and similarly endorsed, after the collapse
of Atlantic Acceptance.
Purchase and Re-sale of Cerametal Industries Limited
According to Delia Scala, Morgan on several occasions contem-
plated amalgamation of the enterprises of D.H.I, and Dalite Corporation
since their operations were largely in the same field, except those con-
nected with prefabricated housing to which Eugene Last was becoming
increasingly addicted. All of these attempts, however, foundered on the
intransigence of Last who had nothing in common with Delia Scala
except his Rumanian background. But Last was not loath to take advant-
age of one transaction between them, undoubtedly undertaken at
Morgan's instigation and undoubtedly detrimental to D.H.I. Cerametal
Industries Limited carried on business at Streetsville, Ontario and com-
peted to a greater extent with Dalite than with D.H.I. This company
was in receivership in 1963 and had attracted Delia Scala's attention as
a possible acquisition. According to independent valuations given to
the Clarkson Company as receiver, the land and buildings at Streets-
ville had a market value of between $150,000 and $175,000 and the
machinery and equipment had a "distress replacement value" of
590
Chapter IX
$65,000.* Delia Scala was able to arrange a purchase, including assump-
tion of the company's liabilities, for $561,000 which Morgan agreed to
for the principal creditor of D.H.I. Burton was instructed to prepare
the necessary documents, but on the very day of closing was told by
Morgan, in the presence of Delia Scala and Wagman, that a change
would have to be made if D.H.I, were to obtain Atlantic funds to com-
plete its part of the purchase; the result was that Cerametal was sold
to Dalite Corporation for $561,000 and forthwith resold to D.H.I, at a
price of $1,147,000. D.H.I. assumed a mortgage for $200,000, received
a loan of $361,000 from Commodore Sales Acceptance by factoring
with it Cerametal's accounts receivable in that amount (subsequently
restated at $355,000), assumed federal sales tax liabilities of Cerametal
in the amount of $25,000 and issued from its treasury 55,000 preference
shares to Dalite, valued at $561,000. Thereafter the Cerametal land
and buildings were given a value in the books of D.H.I, of $411,000
and the machinery and equipment of $350,000. All of this took place
in July 1963, and its effect on D.H.I., Dalite and Commodore Sales
Acceptance was effectively summarized by questions put to Mr. Alles
by Mr. Shepherd as follows : 2
"Q. I would like to deal now with the effect of this transaction on each
of the three companies involved in them, that is to say, D.H.I., Dalite
and Commodore Sales Acceptance. What was the effect on the balance
sheet of D.H.I, in entering into this transaction?
A. Well, D.H.I, showed that there had been attributed to it in cash
for preference shares, $555,000, thus increasing the equity in the
companies.
Q. What was the shareholders' equity position of D.H.I, at the end of
the fiscal period last ended, prior to this transaction being entered into?
A. That would be at December 31st, 1962. The deficit or the deficits
was $5 15,000-odd, less the share capital of $226,000, for a net nega-
tive equity of $289,000.
Q. I take it then that if the company had not lost any money in 1963,
the effect of the sale for cash of these preference snares would have
been to change the shareholders' negative equity into a positive equity,
if that is the right word to use?
A. Yes.
Q. Now, by the time we came to the end of 1963, what in fact hap-
pened to the shareholders' equity?
A. Well, the shareholders' equity had declined to — well, it was a nega-
tive equity of approximately $70,000.
'Exhibits 1949-50.
■Evidence Volume 27, pp. 3646-9.
591
Lucayan Beach and Dalite
Q. And why was that?
A. The deficit account had increased to $847,000-odd, less the share
capital, which now had increased from the previous year's $226,000-
odd to $776,000-odd.
Q. So the effect of this transaction on D.H.I, was to put $550,000
additional into the equity of the company, is that so?
A. That is so, yes.
Q. But since the company sustained a loss in the order of —
A. It was $330,000 in 1963.
Q. Yes, $330,000, the shareholders' equity was still in a negative
position at the end of the year, is that correct?
A. That is correct.
Q. The equity had still been depleted?
A. Exactly.
Q. So far as Dalite is concerned, can you state what the effect on the
financial statement of Dalite was of this Cerametals contraction?
A. Yes. They reported a profit of $561,000 on the sale of fixed assets.
Q. Can you state in what manner that profit is recorded in their
statement?
A. Yes. In the financial statements for the year ended December 31,
1963, a profit was recorded as a profit on the disposal of fixed assets,
which was credited to the capital surplus account.
Q. So the effect of this transaction on the statement of Dalite then was
to show that they had made a profit in the year of $561,000?
A. That's correct, yes.
Q. What happened to the preference shares which were issued by
D.H.I.?
A. Well, these were in fact issued upon direction of Dalite to A. G.
Woolfrey in trust.
Q. And for whom was he holding them?
A. As security for the indebtedness of Dalite to Commodore Sales
Acceptance.
Q. And therefore, what was the effect on the affairs of Commodore
Sales Acceptance of this transaction having taken place?
A. Well, it would give the appearance of additional security being
held for the loan to Dalite.
Q. Then the D.H.I, statement, I take it, would record approximately
$550,000 more of fixed assets, and the liability side of the statement
would be increased by a like amount, reflecting the issue of the prefer-
ence shares?
A. Yes, that is substantially correct, yes.
592
Chapter IX
Q. Apart from the beneficial effect that transaction would have had
upon the shareholders' equity position in D.H.I., had D.H.I, not lost
money during that year, do you agree that it would appear that the
transaction was beneficial to Dalite and detrimental to D.H.I.?
A. Yes, I would say so."
It will be recalled that Morgan at this time held his 25% interest in
Dalite Corporation beneficially from Carl Solomon in trust and was thus
enhancing the apparent value of his own equitable interest; but it is little
wonder that he was in a quandary as to what to do with the 80%
interest in D.H.I. Limited which was also at his disposal, and that he
was restive under Bernard Burton's quite proper insistence on instruc-
tions as to what to do with the shares.
In fairness to Mastino Delia Scala it should be observed that his view
as to the real value of the Cerametal assets was based on a report of
Dominion Appraisal Company Limited of Toronto made on December
4, 1961, prior, be it said, to the company going into receivership. This
appraisal showed the replacement value of the assets at $1,215,021 and
their depreciated value as at that time was $1,108,459. His views as to
the propriety of carrying Cerametal's assets as they were carried on the
books of D.H.I. , and the effect of the transaction on this company, should
be quoted, since they reveal the difficulty of his own situation which
compelled him to turn a blind eye to the major disadvantage staring him
in the face.3
"Q. Whose suggestion was it that it would be desirable to put the
assets on the books of D.H.I, at substantially the figures shown on the
appraisal done for Cerametals in 1965?
A. It was — in the right sequence — my desire to show a better break-up
value for the assets. It was Mr. Morgan's suggestion and instructions
to make the transactions via Dalite but it was subsequently our — when
I say mine, mine and my staff decision or finding to break up the total
purchase price according to the appraisal or book values because there
was never in the direct transaction for Clarkson any specified alloca-
tion for the various assets.
Q. It was your desire or the desire of you and your subordinates at
D.H.I., to purchase these assets and at whatever price you purchased
them, after you brought them into the company, bring them to the
books at figures which you felt could be supported from the Dominion
Appraisal Company appraisal?
A. Correct.
Q. Which would have resulted in an appraisal surplus, the amount
would have been added and quite properly added to the surplus of
D.H.I. , is that correct?
A. That's correct.
'Evidence Volume 28, pp. 3751-4.
593
Lucayan Beach and Dalite
Q. And that as such is a commonplace arrangement?
A. In fact now as you brought it up, I recall that I was searching for
the appraisal because I was told by my auditors that to show it prop-
erly, one would have to show this increase as assets and as well, I was
certainly —
Q. This would be shown as an appraisal surplus?
A. Yes.
Q. Mr. Morgan had a modification to that, in that it was his desire
that assets be purchased by Dalite at the figure of $561,000, and then
actually sold at this higher value to D.H.I. , because in his view, it
would as indeed it did, improve the profit and loss statement of Dalite.
A. Correct.
Q. You would agree that this method of dealing with the purchase
of these assets was beneficial to Dalite and detrimental to D.H.I.,
wasn't it?
A. With your permission, and with all due respect, I agree that they
were beneficial to Dalite, but I do not see in principle that they were
to D.H.I. , detrimental to D.H.I. I fully agree that in the long run, the
shareholders of D.H.I, could possibly — let's say would not benefit by
it or something of this nature, but I do not see any drawback for
D.H.I, in this transaction at that time. In other words, I was not
opposed to it.
Q. No, but you were not, were you, Mr. Delia Scala, in a position to
oppose, I suppose?
A. No.
Q. I suppose Mr. Morgan had the money, you in the company would
have to do as he saw fit?
A. There is no question on the fact that if I thought I should have
opposed it, I wouldn't have done anything in a very determined way
because I had to borrow money, $350,000 or $360,000 against re-
ceivables.
Q. Let's break it down into its constituent elements, then I will leave
the point.
A. Yes.
Q. First, I understand that it was then your opinion, indeed it remains
your opinion that it was to the benefit of D.H.I, to purchase the Cera-
metal assets, is that correct?
A. Very much so.
Q. It was then, and remains your opinion that it would be advan-
tageous to D.H.I., having purchased them, to cause to be shown upon
the balance sheet of D.H.I., properly identified as an asset, the excess
of what you believed the actual value of these assets to be over what
you had to pay for them?
A. Correct.
594
Chapter IX
Q. And that remains your opinion?
A. Yes, correct.
Q. But D.H.I, originally had the right to purchase the assets at
$561,000, and to accomplish the other two objects very easily had it
purchased them at the sum it was required to purchase them of $1,147,-
000. My question was directed really to that aspect of the transaction.
Do you not agree that that was clearly detrimental?
A. Yes.
Q. Detrimental to D.H.I.?
A. That aspect, yes."
D.H.I. Limited a Heavy Drain on Atlantic Funds
The relationship between Delia Scala and Morgan was a curious
one. Compared to most of the people that Morgan was dealing with
Delia Scala was not notably deficient in business judgment and was
withal an honest man. They were involved together in another trans-
action which resulted in heavy potential loss for Atlantic Acceptance —
the financing of Conarm Developments Limited — and which will be
referred to hereafter.1 Morgan was obviously held in high regard by Delia
Scala and was in the unusual position of being able to rely on Delia
Scala's good faith, to which the instructions of the latter to Burton about
the disposition of the 80% interest in the shares of D.H.I, in the case of
his death bear witness. The combination was, however, disastrous for
D.H.I, and for Atlantic. Prior to Morgan buying out the Inter-Provincial
group, Commodore Sales Acceptance had a very small commitment in the
shape of a loan against inventory of $30,000 which was adequately
secured. In the nine-month period ended December 31, 1961, and before
depreciation, D.H.I, lost $7,124, but at the end of 1962 the loss amounted
to $387,424 on the same basis and on sales which, after adjustment for
the disparity between the two periods, were comparable. By the end of
1963 the net loss before depreciation was $330,950. In 1964 the com-
pany's operations were catastrophic because the net loss before depreci-
ation was $1,563,559; the pace of loss accelerated in 1965 and in the
nine-month period ended September 30 was $1,319,290. The deficit
position of the company as a result was, at December 31, 1961,$ 128,709
and at December 31, 1962, after Morgan had taken it over, $515,716;
at December 31, 1963 it was $847,365, at December 31, 1964
$2,418,643, and at September 30, 1965, $3,757,933. 2 None the less,
during and after 1962, D.H.I, obtained the money it required to operate
from Commodore Sales Acceptance, generally against the security of
'Chapter XV.
'"Exhibits 1942-3.
595
Lucayan Beach and Dalite
factored accounts receivable and inventory. A comparison of the com-
pany's losses before depreciation with the increase in the loans from Com-
modore Sales Acceptance is as follows:3
Increase
Losses in loans
Year ended December 31, 1962 $ 387,424 $ 688,096
Year ended December 31, 1963 330,950 1,572,874
Year ended December 31, 1964 1,563,559 1,672,384
Nine months ended September 30, 1965 . 1,319,290 478,545
Total $3,601,223 $4,411,899
At the final date the book value of all the security, consisting of accounts
receivable and inventory, which was held by Commodore Sales Accept-
ance was $2,105,626, or slightly less than half of the money lent.
It is clear that by this time Commodore Sales Acceptance was lending
to make good the losses of the company and to provide it with working
capital. In addition, loans were being made against progress invoices sent
to customers before completion of orders, and setting out the amount that
was deemed to be receivable on the basis of the work done. The com-
pany's auditors at the end of each year deducted the amount stated by
these progress invoices and did not allow them as accounts receivable;
the loans thus got well ahead of the assigned receivables. A particularly
glaring example is provided by the financial statements of December 3 1 ,
1964, prepared without an opinion being expressed by McLeod, Dickson
& Co., showing the profit and loss calculated by the divisions into which
the company's operations were organized.4 The kitchen division had gross
sales of $848,811 on which the net loss was $805,639; the window
division had gross sales of approximately $1,801,000 for a net loss of
approximately $601,000; and in calculating these losses no allowance
had been taken for depreciation. The explanation provided by Delia
Scala was that the contractors to whom the sales were made had supplied
faulty specifications.
In the upshot, at June 17, 1965 D.H.I, owed Commodore Sales
Acceptance $4,503,396.29 and Aurora Leasing Corporation $727,773,
and Mastino Developments Limited, a holding company of Delia Scala's,
an additional $163,469 to Aurora Leasing, the whole debt being in the
order of $5,400,000. This staggering sum might be expected to justify
the devotion of a whole chapter of this report to a minute examination of
the affairs of D.H.I. Limited and of Mastino Delia Scala himself. But
this brief account has been incorporated in the general treatment of the
affairs of Dalite Corporation, because the only really questionable trans-
action in its history, from the standpoint of its own management, was the
'Exhibit 1945.
'Exhibit 137.
596
Chapter IX
one in which it allowed Dalite to become interposed between it and the
acquisition of the assets of Cerametal Industries. For the rest, it provides
an example of a reckless extension of credit to a company which was
obviously insolvent, and the throwing of good money after bad by C. P.
Morgan which, as evidence before the Commission has abundantly
illustrated, was his most serious weakness as a business man apart
altogether from the fraudulent transactions in which he engaged. A great
deal of the loss incurred by Atlantic Acceptance in its dealings with
Delia Scala was due to the genuine liking which existed between him and
Morgan, and which induced the latter to finance his enterprises on the
mere assurance that they could be made profitable in due time. In the
second volume of the "Review of Loans", prepared for the receiver and
manager of Atlantic Acceptance by the Clarkson Company Limited and
lodged with its report in the Supreme Court of Ontario,5 may be found a
wry comment on D.H.I. : "The company really has existed because of the
very strong personality of its president who seems to spend the majority
of his time convincing creditors and customers that they should do the
things that their own good business sense tells them they should not do."
Obviously Delia Scala's persuasive sincerity has won him some of the
advantages of a charmed life, because instead of suffering the bankruptcy
which, from the magnitude of its losses and the size of its indebtedness to
Commodore Sales Acceptance, might have seemed inevitable, D.H.I, was
still in operation under a loose and informal receivership arrangement at
the end of 1966. Part of the reason for this, and perhaps most of it may
be found in a concluding paragraph of the Clarkson review which reads:
"While it might appear that we have been more lenient with Mr.
Delia Scala than necessary, it should be understood that providing we
are able to protect our security during any extension period the possi-
bility of obtaining $1,500,000 or for that matter $1,000,000 from a
going concern purchaser is far better than the recovery in a forced
liquidation which would be a maximum of $800,000 and probably more
like $500,000 to $600,000."
And doubtless the amiable qualities of Mr. Delia Scala have also played
their part.
Final Figures for Dalite Corporation — 1964 and 1965
The last financial statement of Dalite Corporation prepared by
Walton, Wagman & Co., again without opinion, was for the year ended
December 31, 1964. In this period the company's sales were alleged to
have risen to something in the order of five times what they were in the
previous year, or to a figure of $8,679,000. The gross profit reported was
approximately $1,355,000 and the net profit $37,115. The accounts
"Exhibit 5124.
597
Lucayan Beach and Dalite
receivable had risen from $323,237 to the remarkable sum of $7,003,043,
mostly owing by Daylite of Grand Bahama. Had this company been able
to pay Dalite this very large amount and had there been no further con-
struction costs incurred in connection with building projects on Grand
Bahama Island for which bills had been sent out, the net profit of $37,1 1 5
could have been achieved after writing off the prepaid sales promotion
and patents item, which indeed was done according to the statement. In
point of fact substantial additional construction costs were incurred early
in 1965 to complete the Grand Bahama projects, and the invoices to
Daylite of Grand Bahama were suspect, as has already been said, to an
extent which detailed examination will reveal. No contracts between the
two companies have ever been found and must be considered as non-
existent. In most cases Daylite of Grand Bahama was selling the com-
pleted projects to the Lucayan Beach Hotel and Development company
and if the prices of sales to this company are compared with the original
billings from Dalite Corporation it is apparent that over-billing by the
latter was substantial. In the absence of any contract Dalite could send
an invoice for any amount it cared to, and in fact Daylite of Grand
Bahama sold the completed projects for substantially less money than
the sum of the invoices presented to it. Daylite of Grand Bahama had no
money, and in consequence was unable to pay any more than the par-
ticular asset had been sold for; in short the solvency of Dalite depended
entirely on the ability of Daylite of Grand Bahama to pay the amount
which the former had chosen to bill it.
One financial statement was prepared by accountants after Decem-
ber 31, 1964, the statement of August 31, 1965, constructed substantially
by Mr. Wolfman from the books of the company and figures supplied by
the trustee. These, as shown on Table 47 in relation to the eight-month
period ended on that date, have been adjusted to delete substantial billings
made by Dalite Corporation to Daylite of Grand Bahama as already
noted, since these were either duplications or disputed and there was no
evidence to support them. In the main they were made on or about June
30, 1965, or very shortly after the collapse of Atlantic Acceptance. After
adjustment, sales for this period were $1,065,000, direct cost of sales
$1,834,443 and the net operating loss $1,225,038. Reference to Table
48 shows impairment of the shareholders' equity in the amount of
$2,390,218. Interest had accrued against the company during this final
period in the amount of $403,381 and accounts receivable declined by
about $3,500,000, there being some $3,416,060 receivable in the main
from Daylite of Grand Bahama. At the time of the Atlantic collapse
Dalite owed the Atlantic group approximately $4,650,000, but the reduc-
tion of this indebtedness from $7,500,000 as at December 31, 1964 had
been effected, as will be recalled, by the sale of treasury shares of
Lucayan Beach Hotel and Development Limited to Hugo Oppenheim
598
Chapter IX
und Sohn and by the rental of the hotel to L.B.H. Management, to
enable the Hotel Company to pay something more than $4,000,000 to
Daylite of Grand Bahama. The reduction in consequence of the Dalite
loan to Commodore Sales Acceptance was merely a transfer of indebted-
ness, and the money lent by the latter went round in a circle accompanied
by the familiar flurry of book-keeping entries.
George H. Weinrott as Financial Adviser
Before considering the final period of expansion of Dalite Corpora-
tion, backed by unlimited supplies of Atlantic money, and the fatal
involvement in the Grand Bahama venture which left it prostrate after
the Atlantic collapse and eventually bankrupt in status as well as in fact,
it is instructive to turn to the part played by George Harold Weinrott,
first and briefly in the affairs of the company, and subsequently as the
impresario of Cimcony of Canada Limited, a company which absorbed
nearly $2,000,000 of Atlantic money of which very little can conceivably
be recovered. Weinrott's name has appeared before from time to time in
this report, and his peculiar mixture of energy and incompetence make him
a protagonist of the Atlantic tragedy. Eugene Last met him for the first
time in New York in 1962 on the introduction of his friend Joseph
Goldberg, and Weinrott undertook to help Last with Dalite's plan to sell
prefabricated housing in Panama. There is no doubt that Last, in spite
of much practical experience and shrewd contriving, had a good deal of
the folie de grandeur which was noticeable in Weinrott, and indeed in
C. P. Morgan. Last brought Weinrott to Morgan's office in Toronto, and
believed that Morgan had met him before, because he put his arm around
Weinrott's shoulders and conducted him into the inner sanctum, leaving
Last for the moment to his own devices. There is no evidence that this
was the case before the Commission, but Morgan may well have heard of
Weinrott as a dealer in mortgages and expounder of what he called the
"Cimcony concept", which envisaged a world-wide group of companies
financing housing projects through mortgages of real estate and selling
the mortgages to long-term investors at a profit. Moreover Weinrott had,
as has been seen, an associate of some notoriety at least in the person of
Carrol M. Shanks, formerly president of the Prudential Assurance Com-
pany of America, who had resigned from that position under pressure as
a result of a well-publicized conflict of his own interest with that of his
company. Dalite was already in difficulty at Thompson, Manitoba with
the costs of the erection of the houses there, and Last testified that
Morgan suggested the appointment of Weinrott as a director of Dalite
Corporation (Manitoba) Limited to supervise the mortgaging of its
Thompson properties. Funds for this purpose were provided under the
National Housing Administration plan by the Bank of Nova Scotia,
through the intervention of a Last associate and Dalite employee, Brian
599
Lucayan Beach and Dalite
Sparks, whose father was a "business developer" employed by the bank
in Toronto. Ultimately Morgan induced Last to accept Weinrott as
'financial vice-president" of Dalite Corporation and it was at least
planned to have Weinrott made a signing officer of the company.
Weinrott was indeed made a director on December 6, 1962 and the
minutes of its directors' meetings1 do not record his disqualification until
June 17, 1964. In any event he paid his first visit to Thompson towards
the end of 1962, and to this event Eugene Last was disposed to attribute
all the difficulties which Dalite subsequently had to contend with in that
part of the country. The connection was brief and was severed as a result
of Last's discovery that, during his own absence from Toronto, Weinrott
had issued a Dalite cheque, signed by himself and Lillian Martin, dated
January 9, 1963 and made payable to Weinrott in the amount of
$15,000. The particulars originally written on the cheque, as it was
introduced into evidence,2 had been heavily scored out in pencil and
typed above them were the words "expenses research and investigation
for Dalite Corporation (Canada) Limited". According to Last, under
this had originally been typed "commission on arranging mortgages for
Thompson, Manitoba", but examination by the Centre for Forensic
Sciences established the erased words as "Salary and commissions to
12/31/62". Last testified that Weinrott obtained the cheque from one
Robert Stoller who was working in the Dalite office in the interest of
Commodore Sales Acceptance, and that between the time when he first
observed it in its cancelled state and complained to Morgan about it,
and then returned to secure it for inspection by the latter, this alteration
had been made. Morgan said he would look into the matter, but Last
derived no satisfaction from this, and dismissed Weinrott from his
position in Dalite on the grounds that he had no right to a commission
on mortgages arranged by Brian Sparks. This was clearly the case, and it
is also clear that Weinrott, or somebody in his interest, recognized the
fact and saw fit to alter the particulars on the cheque. It was, however,
highly characteristic of Weinrott whose principal activity throughout his
connection with Morgan seems to have been paying fees to himself, or to
companies which he wholly owned, in large amounts for services which
mainly consisted of unprofitable employment and downright waste of
large sums of Atlantic money. Sparks, who was examined under the
Securities Act by Mr. Cartwright on August 19, 1966,3 testified that he
eventually recovered $5,000 of the fees paid in relation to the mortgages
at Thompson from Weinrott later in 1963, and, in accordance with an
undertaking given in writing by Sparks on April 10, 1962, he was bound
to divide any such fees with Joseph Goldberg who had apparently
introduced him to the Dalite situation at that time. Sparks held the
'Exhibit 232.
"Exhibit 3207.
'Exhibit 4201.
600
Chapter IX
position of "vice-president marketing" at Dalite until November 1963,
and promoted an abortive transaction in Mexico, in the course of which a
model prefabricated house was erected in that country at a total loss to
the company of the money expended.
The Incorporation of Cimcony of Canada Limited
It is difficult now, in view of the many afterthoughts which have
been expressed before the Commission in evidence, to appreciate the
true nature of the breach between Weinrott and Last, since, as will be
seen, their affairs continued to be linked in a number of enterprises. The
original understanding between them undoubtedly contemplated Weinrott
receiving an interest in Dalite Corporation and perhaps exercising some
measure of control, at least during the period of the financing for which
he offered to make himself responsible. But, although Weinrott was
always willing to abet the efforts of others as long as they offered an
opportunity of making a personal profit, he was seldom able to perform
in accordance with his undertakings, and Last was to realize this earlier
than Morgan. In any event Weinrott, having surveyed the scene at
Thompson, was not disposed to abandon the field, and on April 19, 1963
Cimcony of Canada Limited was incorporated on his instructions given
to Senator David A. Croll of the Toronto law firm of Croll, Borins & Sniff,
with an authorized capital of 10,000 shares at a par value of $10 per
share. M. A. Goldberg of that firm, who was immediately responsible for
the incorporation, testified at length before the Commission on May 9,
1966.1 Three shares were originally issued, one to Weinrott, and one
to Goldberg and to a stenographer in the office, both of whom were
nominees for Weinrott. There were a number of appointments to various
offices which largely reflect changes of mind on Weinrott's part, but the
most significant and enduring of these was that of Harry Wagman as
treasurer on May 9, 1963. For a brief period the president-designate was
one Thomas Stevens who had been persuaded by Eugene Last to leave
his employment by Central Mortgage & Housing Corporation and entered
the service of the new company at the invitation of C. P. Morgan. Stevens
was to be paid a salary of $10,000 per year and was to direct the
mortgage brokerage activities of Cimcony of Canada, but his efforts to
establish his own position and to introduce some sense and order into the
activities of Weinrott led to a falling out with the latter and his dismissal
in June, tamely acquiesced in by Morgan. Stevens' evidence before the
Commission2 is of interest only because it reveals what a difficult person
Weinrott was to work with and how in the end he prevailed over the
men who held the purse-strings. Having set up the company he was loath
to work with anybody in it, and spent most of his time travelling between
Evidence Volume 29.
2Evidence Volume 30.
601
Lucayan Beach and Dalite
New York, Thompson and Toronto, and in Toronto more time in the
offices of his solicitors than in that of his company. A young man by the
name of Marvin Rotman, a "mortgage trainee" hired by Weinrott with-
out reference to Stevens, gave a vivid picture of Weinrott's activities.3 He
was by then a man in the early seventies who started his business day at
six o'clock in the morning, talked furiously on the telephone for hours to
points all over North America and retired early after dining. Both
Stevens and Rotman were advised to leave their positions by Harry
Wagman who appears to have formed an accurate opinion about the
effectiveness and propriety of Weinrott's methods. Morgan, however,
remained a supporter until the end, obviously with misgivings but always
in the hope that Weinrott's large promises about selling many millions of
dollars worth of Atlantic Acceptance notes, and his claims to be able to
tap unlimited resources, might some day be realized.
Weinrott assumed the presidency of Cimcony of Canada on June 28,
1963. The only infusion of capital into the company came from Valley
Farm and Enterprises Limited in the amount of $100,000 and, in accord-
ance with a letter of May 1, 1963,4 this was to be a subscription for the
ordinary shares of the company. By this letter, the terms of which were
accepted by Weinrott, he was given an option, open till April 30, 1966,
either to purchase 50% of the stock held by Valley Farm, after making
allowance for a return of 10% upon its investment, or to take 50% of
the net profit before tax made by the company, subject to the same pro-
visions. The shares involved were 9,997 of the 10,000 authorized shares,
representing all except the directors' qualifying shares for which no
money was ever paid to the company. It would be tedious to follow the
many changes of mind by Weinrott as to the ownership of these shares in
detail; suffice it to say that it was planned at one point to have the share-
holders of Cimcony Limited, the Bahamian Company incorporated in
September 1963, namely Weinrott, Shanks, Riley and Mortgage Trust
& Savings Corporation (Bahamas) Limited, owned by Morgan, hold them
in the same proportions as in Cimcony Limited, and to issue $100,000
worth of preference shares of Cimcony of Canada, authorized by supple-
mentary letters patent, to Valley Farm and Enterprises. M. A. Goldberg,
however, never received any reply to correspondence addressed to Valley
Farm and Enterprises or to David M. Samuel, and Weinrott expressed
the view that Harry Wagman was the cause of this company failing to
honour its agreement. In the end the 9,997 common shares, after a brief
sojourn in Nassau, remained in Goldberg's hands and were turned over
to the trustee in bankruptcy. It is probable that the real reason for
keeping this whole matter in suspense was that the company's licence as
a mortgage broker would have been imperilled had its shares been in
"Evidence Volume 30.
'Exhibit 2000.
602
Chapter IX
alien hands, as indicated by a letter of July 16, 1963 from Croll, Borins &
Sniff to the Ontario Department of Insurance,5 assuring it that "all of the
outstanding unissued shares of the company are beneficially owned by
Valley Farm and Enterprises Limited which is a company incorporated
under the laws of the Province of Ontario."
Briardale Investments Limited and Ticonderoga Investments Limited
Weinrott, impressed with the prospects of Thompson, decided to
build a motel there for the construction of which a company called
Briardale Investments Limited was incorporated, and an apartment
house to be built by a companion company by the name of Ticonderoga
Investments Limited. Both of these companies were evidently owned by
Weinrott, and not by Cimcony of Canada as was occasionally stated in
evidence given to the Commission. The Briardale motel was carelessly
located on lands which were zoned strictly for residential purposes, and
in consequence had to be completed in the form of a residential club. The
Ticonderoga apartment building was never in fact completed by
Weinrott's company. Weinrott, who described himself as a "housing
consultant", was the principal in an Ohio corporation entitled Housing
by Cimcony Inc., organized to develop a prefabricated house made of
a special chemical plastic compound, described by him as "polyurethane",
to replace more conventional building materials and developed by his
associate Thomas F. Riley. This company provided a prototype house
which was erected at Thompson. The two principal buildings referred to,
according to Donald B. Sommerville, a professional engineer who valued
these assets for the trustee in bankruptcy of Cimcony of Canada, were of
cheap and conventional construction without even the deep concrete
foundations provided for the Dalite houses erected by Cansameric Indus-
tries. The only novel feature, which was no novelty in the north of
Manitoba, was the use of timber piling to anchor the buildings below the
line of permanent frost.1 The actual builder of these structures was a man
called DeJonckheere, a special favourite of Weinrott who had caused
trouble for Dalite, and the whole operation was conducted with money
advanced by Commodore Sales Acceptance through Cimcony of Canada
to Briardale and Ticonderoga on the most lavish scale, with a full
measure of Weinrott's driving self-confidence. Rotman described his
casual selection of suppliers of materials to be shipped to the building
site from Toronto by thumbing through the yellow pages of the telephone
book, without asking the advice of anybody knowledgeable in the trade.
It was not until the end of October 1964 that Weinrott abandoned the
stricken field at Thompson to concentrate on fairer prospects in the
Bahama Islands.
6Exhibit 2003.
'Evidence Volume 30 and Exhibit 2050.
603
Lucayan Beach and Dalite
Source and Disposition of Funds for the Weinrott Companies
The flow of very considerable funds from Atlantic Acceptance into
these projects was examined by Mr. R. W. Scott of Clarkson, Gordon &
Co., who testified before the Commission on the subject on May 9 and
10, 1966.1 In addition to the affairs of Cimcony of Canada, Ticonderoga
Investments and Briardale Investments, also considered were those of
Housing by Cimcony Inc. so far as he was able, and of another American
corporation known as F.F.C. Construction Corporation Inc., a wholly-
owned subsidiary of Cimcony of Canada organized to develop an urban
renewal project in Buffalo, New York. The activities of this company
included the erection of one of the prototype houses produced by Housing
by Cimcony in Columbus, Ohio, but got no further than that because
its proposal was rejected by the authorities in Buffalo. All of the cost of
this venture was also borne by Commodore Sales Acceptance through
advances to Cimcony of Canada.
Mr. Scott's analysis of the source and disposition of funds for the
three companies, Cimcony of Canada, Briardale Investments and Ticon-
deroga Investments, during the period May 10. 1963 to September 30,
1965. is as shown opposite.2
The first advance by Commodore Sales Acceptance to Cimcony of
Canada was made on August 19, 1963, by a cheque in the amount of
$100,000. By the end of October 1964, at the time of George H. Wein-
rott's withdrawal from management of the company's affairs, they had
reached a total of $1,474,028.93. As might be expected, they continued
until the eve of the Atlantic collapse, but, no doubt for greater security,
were paid to an account in the name of S. S. Chusid in trust. Chusid
was an associate in the office of Wagman, Fruitman & Lando, and these
payments amounted to an additional $187,500. Letters of credit on
behalf of the three companies, paid by Commodore Sales Acceptance
on November 18, 1963 and July 16, 1964, amounted to $142,837.27
and additional amounts paid by cheque to other parties, and charged to
the account of Cimcony of Canada, were in the aggregate $14,505.34.
Against a total of $1,818,871.54 advanced, repayments were made be-
tween December 1963 and June 1965, mostly from the account of S. S.
Chusid in trust, for a total of $91,142.90 of which $72,907.78 was
interest. However, interest in the amount of $94,871.74 was capitalized
by Commodore Sales Acceptance and a further $52,116.08 was receiv-
able at June 30, 1965, so that the total amount receivable on the books
of Commodore Sales Acceptance at that date was $ 1,947, 624. 24. 3
'Evidence Volumes 29-30.
•Exhibit 2016.
'Exhibits 2017-8.
604
Chapter IX
CIMCONY OF CANADA LIMITED, BRIARDALE INVESTMENTS
LIMITED AND TICONDEROGA INVESTMENTS LIMITED
Source and Disposition of Funds from May 10, 1963 to September 30, 1965
Cimcony Briardnle Ticonderoga
of Canada Investments Investments
Limited Limited Limited
Sources of funds
Commodore Sales Acceptance
Limited $1,727,728.64
Valley Farm and Enterprises
Limited 100,000.00
Rental revenues and
miscellaneous receipts 37,729.55
Ticonderoga Investments Limited $ 2,860.00
Cimcony of Canada Limited 545,931.06 $ 555,861.00
Totals $1,865,458.19 $ 548,791.06 $ 555,861.00
Disposition of funds
Briardale Investments Limited .... $ 545,931.06
Ticonderoga Investments Limited 555,861.00 $ 2,860.00
Commodore Sales Acceptance
Limited $ 24,219.21
Housing by Cimcony Inc 146,648.78 18,125.87 41,339.84
George H. Weinrott & Company
Inc 47,001.85 7,480.00 3,740.00
Dalite Corporation (Canada)
Limited 9,854.83 203,943.21 92,274.75
Total of other amounts paid for
building costs and expenses .... 553,867.41 294,929.00 415,631.97
$1,859,164.93 $ 548,697.29 $ 555,846.56
Bank balances,
September 30, 1965 $ 6,293.26 $ 93.77 $ 14.44
Sources
Commodore Sales Acceptance
Limited $1,703,509.43
Valley Farm and
Enterprises Limited 100,000.00
Rental revenues and
miscellaneous receipts 37,729.55
$1,841,238.98
Disposition
George H. Weinrott &
Company Inc $ 58,221.85
Housing by Cimcony Inc 206,114.49
Dalite Corporation (Canada)
Limited 306,072.79
Total of other amounts paid for
building costs and expenses 1,264,428.38 1,834.837.51
Total of bank balances,
September 30, 1965 J 6.401.47
605
Lucayan Beach and Dalite
Cimcony of Canada Buys an Atlantic Note
To the total of Atlantic funds involved must be added the $100,000
supplied by Valley Farm and Enterprises which was advanced on May
10, 1963, and of which $82,650 was paid back by Cimcony of Canada
only four days later to buy 17,000 common shares of Commodore Busi-
ness Machines. Thomas Stevens' explanation for this was that, after
returning from Thompson with Weinrott, who during their stay had told
him that he was taking over Dalite Corporation from Eugene Last, he
had reported to C. P. Morgan, at Wagman's suggestion, that Weinrott's
expenses were rapidly eating up funds of Cimcony of Canada. Morgan
had told him that he would soon take care of that, and the substitution
of the 17,000 shares of stock for $82,450 of the $100,000 advance was
the result. However that may be, by August 15 Weinrott had induced
Valley Farm and Enterprises to repurchase the shares at the price of
sale.1 The amount of this advance was always treated as a loan on the
books of Valley Farm and Enterprises bearing interest at 10% , and from
the records available it would appear that nothing was paid on either
principal or interest. Although Cimcony of Canada made no profit on
this, a later transaction in which a little income was made must be re-
ferred to in this context. On May 28, 1964 Aurora Leasing Corporation
borrowed $2,000,000 from Commodore Sales Acceptance and advanced
$2,000,000 to the company2 which paid it to Atlantic Acceptance Cor-
poration for the purchase of a junior subordinated short-term note.
Atlantic Acceptance repaid the $2,000,000, together with interest, in four
payments on July 22, September 4 (there being two payments on this
date) and September 29 of the same year, and Cimcony of Canada on
the same dates repaid Aurora Leasing with interest, making $1,340.21
on this aspect of the transaction.3 Atlantic Acceptance, of course, sup-
plied all the money for this purchase and sale, and the effect on its ability
to extend its borrowing under the provisions of the various trust inden-
tures supplies the explanation, if not justification, for an apparently trivial
arrangement. Further evidence of its background and significance was
given by Mr. Wolfman to the Commission.4 The note was not issued
under the provisions of any trust indenture, nor was there any authoriza-
tion for its issue by the directors of Atlantic Acceptance; but on July 9,
1964 an indenture to secure junior subordinated notes was approved by
the board, and the president advised it that negotiations to sell such notes
to the Connecticut General Life Insurance Company had just then been
completed. On July 17 Atlantic duly sold a $2,000,000 junior sub-
ordinated note for $2,000,000 to that company, and with the proceeds
redeemed the one held by Cimcony of Canada, which repaid Aurora
'Exhibits 1600.1 and 1600.2.
•Exhibit 929.
•Exhibit 2021.
'Evidence Volume 69.
606
Chapter IX
Leasing $920,000 of the $2,000,000 borrowed and re-invested the
balance of $1,080,000, or $1,000,000 in U.S. funds, in one of the new
junior subordinated notes, No. J.S.S.T.N-2.5 Cimcony of Canada con-
tinued to hold junior subordinated notes, to an extent diminished by the
sale of part of its holdings to others, until October 1, 1964 when it ceased
to be a noteholder.
As will be seen by reference to Chapter X6 and to Chapter XVI
for a fuller discussion, by issuing a $2,000,000 subordinated note, paid
for with its own money and included in the calculation of its subordin-
ated debt reported to the noteholders in the supplementary information
supplied to them on June 30, 1964, Atlantic was in a position to sell an
additional $7,000,000 worth of senior notes under the existing trust
indenture, compliance with which always taxed Morgan's ingenuity to
the utmost. On September 1, 1964, an invoice for "professional finan-
cial advisory services"7 was sent to Atlantic by Cimcony Limited, Wein-
rott's Bahamian company, in the amount of $31,250, which was paid by
cheque dated December l.8 In the previous May, according to Weinrott's
notes,9 an arrangement had been made between Morgan and himself to
employ Cimcony Limited as fiscal agent for Atlantic. The fee paid must
therefore include remuneration for the signal services rendered by Cim-
cony of Canada on this occasion, because the only other services in 1964
were of the most perfunctory kind. Carrol M. Shanks was asked about
the fee paid to Cimcony Limited in the course of his examination in
New York10 and, according to his recollection, he made two telephone
calls to officials of Connecticut General Life Insurance Company and
Mutual Benefit Life Insurance Company to secure appointments for
C. P. Morgan who did all the negotiating himself. In fact the estab-
lished fiscal agent for Atlantic Acceptance in the United States was
Kuhn, Loeb & Co. of New York, and Atlantic also paid the usual com-
mission to it for the sale of the notes in question.
Weinrott and the Thompson Mortgages
Harry Wagman's attempts to control Weinrott's expenditures as a
signing officer of Cimcony of Canada were in large measure frustrated
by the latter opening an account in his own name in trust in Thompson,
Manitoba, from which he paid out some $330,000 of Cimcony of Canada
money. There were practical reasons for having a local bank account in
Thompson, but one might have expected it to be in the names of Cim-
cony of Canada, Ticonderoga Investments or Briardale Investments, or
all of them. Ticonderoga and Briardale between them paid Dalite
6Exhibit3316.
°pp. 688-9.
'Exhibit 3315.
8Exhibit 3317.
"Exhibit 1976.
"Exhibit 3802.
607
Lucayan Beach and Dalite
Corporation $306,072.79 for building materials left over, or unused,
from its prefabricated housing project which Stevens said were worth
$5,000 and Weinrott described as junk. Nevertheless these payments
were essential if the full tale of Dalite losses on the Thompson project
was to be glossed over and gave Weinrott an additional claim on
Morgan's regard. Although on the books of Dalite these transactions
were properly treated as a sale, on those of Ticonderoga and Briardale
they were shown as mortgages received from Dalite, and the only reason-
able conclusion one can come to is that Wagman, who was doing all the
accounting for the companies involved, was instructed to appease Wein-
rott in this manner. In spite of the fact that Cimcony of Canada, Briar-
dale Investments and Ticonderoga Investments paid Housing by Cim-
cony Inc. $206,1 14.49, Weinrott maintained that it was owed a consider-
able, though unspecified amount in excess of what was paid for the two
prototype houses and nebulous "research and development."
For advances made by Cimcony of Canada to Ticonderoga Invest-
ments and Briardale Investments, mortgages were given for the land on
which the buildings were erected. These mortgages were assigned to
A. G. Woolfrey in trust for Commodore Sales Acceptance, which pre-
sumably held no licence in mortmain in Manitoba. Weinrott was ex-
amined in New York City on behalf of the trustee in bankruptcy of
Cimcony of Canada, pursuant to an order issued out of the Supreme
Court of the State of New York, and his comment on this security, and
generally on the corporate organization of the Thompson project, should
be quoted.1
"Q. What was the method of financing the construction in Manitoba
and Thompson?
A. The companies, Ticonderoga and Briardale, issued mortgages. To
my recollection they were about $500,000 each. I am not sure.
Q. To whom were the mortgages issued?
A. They were issued to Cimcony who assigned them to Commodore
Sales.
Q. How was the value of the mortgages determined? Were the projects
valued and then the mortgages given?
A. The thing was based on cost, what the actual costs were.
Q. So that Ticonderoga and Briardale had no investment in these
properties at all?
A. No.
Q. Then why were they the owners? Why wasn't the owner Cimcony?
A. Well, it's not customary for the owner to be the mortgagee without
merging what we call the title.
'Exhibit 3411.
608
Chapter IX
Q. What would be wrong with merging the title?
A. Well, it's illegal, that's all that's wrong with it.
Q. There is nothing illegal about it, Mr. Weinrott.
A. Maybe Canadian law is different but here you can't do that. You
can't be the borrower and the lender both.
Q. Cimcony could have used its own money for the purpose of build-
ing these houses. There is nothing illegal about that.
A. But taking back a mortgage would be.
Q. There's been no taking mortgages back. They would become the
owner of the lien.
A. They took back the mortgage, because in the first place this is the
conventional way of doing it. You create, for the want of a better
name, a straw corporation that buys the land, builds the building,
either per se or gives it out on general contract and issues a mortgage
to the lender.
Now, the builder and owner can be a subsidiary in the sense that
the same people own the stock, the same corporation.
The big advantage is you limit the liability. There is nothing more
precarious than building, creating a liability. When you say liability —
I mean I am not talking about the contingent public liability, the injury
to people. I am talking about the liability for payments.
Here you take Cimcony as the holder of the mortgage, and some-
body files a lien. There is no better defense in the world. As a matter
of fact, they tried to prove it. That was the defense the lawyers used
in The Pas some time ago. That is the defense they used, that this
was the same company, Cimcony was the real owner and therefore this
mortgage was an illegal mortgage, and therefore their hen came ahead
of die mortgage.
That would be some problem down here if you tried it that way, so
that you've got to deal at arms' length as much as you can by creating
two separate corporate entities.
The fact that there is identity of ownership of the stock has nothing
to do with it, because then the subcontractor, the supplier, is on notice.
He don't want to ship. If he don't want to work on this building, he
don't want to check. His lawyers don't check the record to see who's
who, that's their headache.
Now, here nobody in this country does that. The owner don't take
back the mortgage. He creates a separate corporate entity and limits
the liability to that job. If you get a deficiency judgment on this job.
you go and hit everything you got. You could even have a lawsuit
started, let's say, without good foundation. In the meantime you've got
a cloud on the title, mister, and you're all tied up all over. This way it
relates only to this specific property domiciled in this particular area.
MR. BAIRD: I would like to introduce as Trustee's Exhibit No. 25
photostatic copy of a memorandum to Mr. H. Wagman dated Febru-
ary 12, 1964 indicating it was a transcription of a long distance mes-
sage from GHW in Thompson to Mr. Wagman and have it so noted.
(Document described marked Trustee's Exhibit 25).
609
Lucayan Beach and Dalite
Q. Please examine this memorandum and tell me whether you sent
this long distance message to Mr. Wagman.
A. In the absence of the original, I can't certify that this is correct or
a copy of the original showing the signature, but I can understand the
intent of this memorandum.
Q. Have you any reason to doubt that you gave such memorandum?
A. February the 12th 1964. Oh, yes, I believe this refers — I am not
certain — but I believe this refers to the difference reflected by this in-
ventory. In other words, the inventory movement was charged to the
project without any additional properties having been built to consume
it yet or a portion of the stuff used.
Q. But the inventory amounted to about $300,000.
A. That is exactly the difference between 600 and 900.
Q. That memorandum, Mr. Weinrott, states that approximately $600,-
000 has been used for other than Briardale and the apartment houses.
(Discussion off the record)
Q. Mr. Weinrott, this memorandum indicates that Cimcony of Canada
was holding a total of $1,500,000 in mortgages on various projects,
Exhibit 25 :
'We are holding a total of $1,500,000 on mortgages on various
projects. We have signed to Commodore approximately one
million.'
This statement fits in with the books of account of Cimcony of
Canada Limited because in February, 1964 Commodore was owed
about $1,100,000 by Cimcony of Canada Limited, and therefore hav-
ing assigned $1,000,000 worth of mortgages to Commodore would
seem to be correct.
The memorandum proceeds to read :
'Out of the amounts advanced to date, approximately $600,000
has been used for other than Briardale and the apartment houses,
leaving $900,000 actually spent on the projects less expenses not
part of the construction.'
So this would indicate that of the money spent by Cimcony,
$900,000 was used for the construction of the apartment houses in
Briardale and $600,000 was used for other purposes; is that correct?
A. I can't answer that. I don't know.
Q. We can show you that $300,000 approximately was paid by Cim-
cony to Dalite.
A. On the inventory, on the shipment?
Q. The amounts paid to Dalite are exactly the same as the statements
which I have shown you.
A. Yes.
610
Chapter IX
Q. However, the books of account of Briardale and Ticonderoga show
the payments to Dalite as being mortgages receivable to Briardale and
Ticonderoga, and we are prepared to show you the original entries in
the books of account of Briardale and Ticonderoga to back up my
statement.
A. But have you ever seen a mortgage, have you ever seen the mort-
gages as recorded mortgages?
Q. We have never seen any recorded mortgages, no.
A. You don't mean 'any'.
Q. We have never seen any mortgages from Dalite.
A. You have seen the others?
Q. Yes. Did Dalite give any mortgages to Cimcony of Canada Lim-
ited?
A. Not that I can remember. I can't see any reason why they would
give us.
Q. Did Dalite give any mortgages to Briardale or Ticonderoga?
A. Not to my knowledge. When you say 'give us,' what do you mean?
Give us money?
Q. We are interpreting the words, Mortgage receivable in the books
of account of Briardale and Ticonderoga.
A. That indicates that somebody paid money to somebody.
Q. Right.
A. If it's a mortgage receivable, does that mean that Dalite owes
Ticonderoga or Briardale, whatever that is?
Q. This is what we interpret the books of account to mean. Further-
more—
A. I don't understand that."
Although this constitutes, among other things, a candid explanation
of how to thwart the claims of mechanics' lienholders, Commodore Sales
Acceptance had to supply $131,674.18 to settle mechanics' liens actions
against the Thompson properties. The two mortgages referred to are
shown as outstanding on September 30, 1965, in accordance with the
books of account of Briardale Investments in the amount of $671,758.68
and of Ticonderoga Investments in the amount of $1,142,462.86. In a
period of some fourteen months, from August 30, 1963 to October 23,
1964, Weinrott was paid by Cimcony of Canada, Briardale Investments
and Ticonderoga Investments, with moneys advanced by Commodore
Sales Acceptance, his fees in the amount of $91,125.32 of which $13,-
375.57 was deducted for the payment of withholding tax to the Govern-
ment of Canada, leaving a net amount paid to George H. Weinrott Inc.,
Weinrott's personal New York Corporation, of $77,749.75. Morgan, in
611
Lucayan Beach and Dalite
his examination in the bankruptcy of Cimcony of Canada,2 admitted that
he had authorized these payments and said that Weinrott was "a facile
person at extracting money." Weinrott told the examiner for the trustee
in bankruptcy that he was used to making money, and apparently the
people who had paid him thought he was worth this large amount. All
his charges were carefully invoiced on paper bearing the letterhead of
George H. Weinrott Inc., generally speaking in round figures, and care-
fully allocated among the three companies.3
Losses of Atlantic Funds and Weinrotf s Apologia
The accounts receivable ledger of Commodore Sales Acceptance
records the amount owing from Cimcony of Canada as at June 17, 1965
as $1,945,535.401 and, as has been seen, this had evidently risen by the
end of the month to $ 1,947, 624. 24. 2 Mr. Scott, comparing the book
values of the assets of Cimcony of Canada, Briardale Investments and
Ticonderoga Investments with their estimated values, using the Somer-
ville estimate for those of Briardale and Ticonderoga, treated the loss
to Commodore Sales Acceptance as $1,132,000. To this he added the
$100,000 paid by Valley Farm and Enterprises, since Commodore Sales
Acceptance was the only secured creditor of Cimcony of Canada and
the estimated value of the assets of the three companies had to be applied
against its loans. His calculation is expressed as follows:3
Book Estimated
"Item Values Values
Cash in banks $ 6,401.47 $ 6,000.00
Receivable accounts
Housing by Cimcony Inc 231,163.70 40.000.00
Dalite Corporation (Canada) Limited 334,402.74 Nil
Land, machinery and building costs 1,073,198.71 765,000.00
Other assets 5,150.91 4,000.00
$1,650,317.53 $ 815,000.00
Estimate of Loss — Commodore Sales Acceptance Limited
Loans by Commodore Sales Acceptance Limited
to the nearest thousand dollars $1,947,000.00
Less estimated value of assets 815,000.00
Estimated Loss $1,132,000.00
Estimate of Loss — Valley Farm and Enterprises Limited
Loan by Valley Farm and Enterprises Limited $ 100,000.00
Less estimated value of assets available Nil
Estimated Loss $ 100,000.00'
2Exhibit 3679.
3Exhibit 2037.
'Exhibit 578.
'Exhibit 2018.
3Exhibit 2049.
612
Chapter IX
The available invoices from Housing by Cimcony Inc. indicate that pay-
ments were made for the purchase of display houses to be located in
Thompson, Man., Buffalo, N.Y., Jamaica and the Bahamas, and that
the whole amount must be treated as advances, except as offset by pur-
chases of the Thompson and Buffalo houses which cost Cimcony of
Canada upwards of $75,000. The state of accounts as between the
three companies and Housing by Cimcony was confused by the fact that
in many cases invoices were missing. In May 1966 the trustee in bank-
ruptcy of Cimcony of Canada had concluded that the only realizable
assets at Thompson were the apartment and club blocks, which it esti-
mated would bring in less than $500,000 if sold, even after the expendi-
ture of upwards of $80,000 on the former to complete the structure as
planned. A sale by tender was being considered because of the difficulty
of finding a ready purchaser, and it may fairly be concluded that the loss
to Atlantic Acceptance of all the moneys advanced to Cimcony of
Canada, Briardale Investments and Ticonderoga Investments through
Commodore Sales Acceptance will be virtually absolute. Before leaving
the subject of Weinrott's intervention in this aspect of the affairs of
Atlantic Acceptance it is only fair to state that he submitted himself
voluntarily to an examination on oath in New York City by Mr. Cart-
wright on behalf of the Commission, at which Carrol M. Shanks also
testified on October 21, 1966. Part of the opening statements of counsel
for the Commission and for Weinrott is relevant, if only to show his
motives in submitting to examination, and was as follows:4
"MR. CARTWRIGHT: For the record I would like to make the
following statement.
The Royal Commission on Atlantic Acceptance Corporation Lim-
ited is anxious to have Mr. George Harold Weinrott attend before the
Commission in the City of Toronto, Province of Ontario, at the ex-
pense of the Commission for his travelling expenses and accommoda-
tion expenses in Toronto in order that he may give evidence with
reference to the matters pertaining to the failure of Atlantic Acceptance
Corporation Limited.
I understand that Mr. Weinrott does not wish to attend before the
Commission in order to give this evidence, and therefore, in lieu of
this attendance this examination, which of course is voluntary on the
part of Mr. Weinrott, is being conducted on this date.
MR. BERNSTEIN: On behalf of Mr. Weinrott I would like the
record to clearly show why I am compelled to advise Mr. Weinrott
not to come to Toronto to testify but to make himself available to
testify in New York City at any time that may be convenient to the
representatives of the Royal Commission.
Mr. Weinrott is now appearing without any Court order, or without
any legal compulsion, but voluntarily and pursuant to arrangements
'Exhibit 3803.
613
Lucayan Beach and Dalite
made to suit the convenience of the representative of the Royal Com-
mission.
Mr. Weinrott and his associates have been severely damaged in
their credit standing by adverse reports reaching banking institutions
as a result of gross misrepresentations in the Toronto press attributed
to alleged revelations developed at hearings held in Toronto by the
Royal Commission. I know that the Royal Commission had nothing
to do with these distortions in the Toronto press, but nevertheless it
has happened.
In my opinion this situation will continue with even more disastrous
consequences if Mr. Weinrott or Mr. Shanks were to appear before
the Royal Commission in Toronto. When they testify in New York,
there is no occasion afforded for such distortions."
Mr. Bernstein, appearing for Weinrott, then put certain questions to him
which he evidently thought would clarify some of the misrepresentations
made, and to which the witness obviously gave prepared answers.
"Mr. Weinrott, the Financial Post of Toronto states that the purchase
of control of Analogue Controls, Inc. 'led to the suspension of Ana-
logue from trading on the Toronto Stock Exchange'. Is that a true
statement?
A. No.
Q. What is the—
A. Evidence in the possession of your Commission clearly establishes
that the contemplated purchase had nothing to do with the suspension
from trading on the Toronto Stock Exchange and took place prior to
the purchase.
Q. The same article states that 'Cimcony Limited formed Cimcony of
Canada Limited,' et cetera. Is that true?
A. That is not true. The Commission knows that Cimcony of Canada
Limited was formed two years before Cimcony Limited with ownership
and control in the name of Valley Farms and Enterprises Limited
which granted an option to Mr. Weinrott to purchase a fifty per cent
interest in Cimcony of Canada Limited. This was never exercised and
Valley Farms through Harry Wagman refused to complete the arrange-
ment providing for the issuance of a hundred thousand dollars worth
of preferred stock of Cimcony of Canada Limited in exchange for their
hundred per cent interest in Cimcony of Canada Limited. All of these
facts are in the possession of the Commission.
Q. Mr. Carrol M. Shanks, your associate, is referred to as a twenty-
five per cent shareholder 'in Weinrott's key company in Canada.' I
refer to the same article. Is that true?
A. That is not true. Mr. Shanks was never a shareholder in Cimcony
of Canada Limited, as evidenced by documents in the possession of
your Commission.
614
Chapter IX
Q. The same article in the Financial Post refers to borrowings from
Commodore Sales Acceptance Limited as 'Weinrott's direct dealings
with Atlantic as described by accountant investigators.' I assume that
they are attributing this to accountant investigators of the Royal Com-
mission, and I want to state clearly for the record that I do not believe
that any accountant investigators of the Royal Commission ever made
any such misstatements. I think this attribution is a distortion for
which the accountant investigators of the Royal Commission has no
responsibility.
But I ask you, is that statement true?
A. That is not true. This is a clear reference to employees of the
Commission. Yet your Commission is in the possession of evidence
which clearly establishes that all borrowings from Commodore Sales
Acceptance Limited was under the absolute control and direction of
Mr. Morgan, and Mr. Wagman and Mr. Woolfrey and that Mr. Wein-
rott had nothing to do with these transactions.
Q. The same article states that 'Cimcony also appears to owe a hun-
dred thousand dollars to Valley Farms and Enterprises Limited.' Is
that true?
A. That is not true.
Q. What is the truth?
A. Evidence in the possession of the Commission clearly shows that
Mr. Weinrott's only knowledge on this subject relates solely to the
option agreement in which Valley Farms owned and controlled a hun-
dred per cent of the stock of Cimcony of Canada Limited. Valley
Farms and Enterprises Limited put up a hundred thousand dollars
worth of Commodore Business Machines stock which was subsequently
sold through Barrett-Goodfellow & Company as a result of which a
hundred thousand dollars was paid into Cimcony of Canada Limited
as a capital contribution from Valley Farms.
The $82,450 was part of this transaction. This transaction took
place under the control and operation of Morgan and Wagman. The
loan and purchase through Barrett-Goodfellow & Company of a sub-
ordinated short term note of Atlantic was handled completely by
Morgan and Wagman.
All of this is clearly established by evidence in the possession of the
Commission.
Q. Now one final point. The same article in the Financial Post refers
to 'receivables due from Housing By Cimcony, Inc.,' et cetera. Is that
a true statement?
A. That is not a true statement.
Q. Are there any receivables due from Housing By Cimcony, Inc.?
A. No. To the contrary. There are no receivables due from Housing
By Cimcony. On the contrary, there are unpaid debts due by
Cimcony of Canada Limited to Housing By Cimcony, Incorporated.
Orders were placed by Cimcony of Canada Limited for its various
615
Lucayan Beach and Dalite
subsidiaries with the idea of creating large scale developments and
housing furnished was in the nature of initial samples with the under-
standing that Cimcony of Canada Limited would pay all costs which
were in fact charged and paid for by Cimcony of Canada Limited up
to the — I don't know what the date was. There is still an unpaid
balance of sizeable amount due Housing By Cimcony, Incorporated,
by Cimcony of Canada Limited."
In passing it should be said, and it will be recalled, that the involvement
of Cimcony Limited in the purchase of control of Analogue Controls
Inc. did indeed lead to the suspension of the latter company from trad-
ing on the Toronto Stock Exchange, because of the guarded and mislead-
ing answers volunteered by Weinrott to the exchange when its officers
were seeking information as to the identity of the participants in this
transaction. Equally misleading is Weinrott's reference to the "capital
contribution" of Valley Farm and Enterprises which, as he knew, never
received any shares. Neither for that matter did Shanks, although Wein-
rott clearly intended that he should. Finally the statement about money
being owed by Cimcony of Canada to Housing by Cimcony is not sup-
ported by any evidence supplied to the Commission by Weinrott, or from
any other source.
Dalite Corporation Projects on Grand Bahama:
Day lite of Grand Bahama Company Limited
The introduction of Dalite Corporation (Canada) Limited to the
Bahamian scene, and the journey of its president, Eugene Last to Grand
Bahama Island in the spring of 1963 for consultations with Allen Manus
and officers of the Grand Bahama Development Company, have already
been described. Last testified that he had been misled by the Port
Authority and the Development Company as to the availability of
materials on the island and the readiness to hand of water and electric
power supply for the contemplated construction. In fact, he said, nothing
was available and Grand Bahama was just a "little scrubby island with
little pine trees and coral everywhere." He said that he knew exactly
what the cost of the employee housing or efficiency units would be; he
had estimated it at $1,200,000, although the actual cost was $1,500,000
In the end, as has been seen, Dalite Corporation, through Daylite of
Grand Bahama, was involved in a number of construction projects which
may conveniently be enumerated here.
The major projects were seven in number. The first was that of
erecting the 110 efficiency units which were one-storey buildings made
of prefabricated panels and erected on a concrete slab foundation, con-
sidered adequate in the Bahamian climate and much less expensive than
the deep foundations found necessary in Thompson, Manitoba. Photo-
graphs of these in the course of construction were introduced into
616
Chapter IX
evidence.1 They were erected at a distance of perhaps a mile from the
Lucayan Beach Hotel and consequently do not appear in the oblique
aerial photograph of the work at Bell Channel Bay, which was also intro-
duced2 and may be seen overleaf. The second project was the "motel"
or "boatel" and the third the marina, most of which may be seen in the
foreground of the photograph with the Lucayan Beach Hotel in the
middle distance. The fourth was a group of twenty separate duplex
buildings containing forty apartments, also out of the picture of the
larger area. The fifth project was made up of several smaller buildings
described as "service buildings", including a laundry, a sewage treatment
plant, the Drivers' Club and a tennis court. The sixth was construction
of a house intended to be the first of a large number to be built for sale
in the Lucayan Beach area, but never duplicated. The seventh was the
proposed Aviation Club for which only an excavation was made and
about which more will be said. These projects were distinguished by
job numbers, according to a list,3 of which 202 was assigned to the motel,
203 and 204 for the efficiency units, 205 for the apartments, 211 for the
sewage disposal plant, 205 A to the laundry, 213 to the tennis court and
221 to the Aviation Club. The convention hall, which was originally
part of the motel contract and was never constructed, was assigned the
number 210.
Construction consisted of prefabricating the component parts of
these structures in the Dalite Corporation plant at Toronto and shipping
them, as already noted, by highway trailers placed on railway flat-cars
through the United States to Fort Lauderdale in Florida, where they were
trans-shipped to Grand Bahama. Daylite of Grand Bahama was the
contractor on the site, although the actual work of erection was done by
sub-contractors, particularly the local Lucayan Construction Company
Limited and Latham Construction Company of Florida. Dalite Cor-
poration received regular inventory and operating loans from Commo-
dore Sales Acceptance to defray the cost of manufacture, and, as it re-
quired funds in addition to any income which it might be generating
itself, informed Woolfrey of the amount needed; a cheque from Commo-
dore Sales would be forthcoming and the amount of it added to the
outstanding debt shown on that company's loan ledger. Control was
exercised by Commodore Sales Acceptance by having Woolfrey
appointed by the Dalite board as a necessary signing officer for all
cheques issued by the company, in conjunction with either Eugene Last
or Lillian Martin, on October 15, 1962.4 The record of these loans,
transcribed from the Commodore Sales Acceptance loan ledger." appears
in Table 45.
Exhibit 3092.
2Exhibit 3091.
"Exhibit 3093.
'Exhibit 232.
'Exhibit 953.
617
618
Chapter IX
The fluctuation of the aggregate amount involved has already been
discussed, as has also the security held by Commodore Sales Accept-
ance consisting of two floating charge debentures securing a total
amount of $1,000,000, the assignment of accounts receivable, and the
placing in escrow of 75% of the common stock of Dalite pending dis-
charge of the debentures. These, of course, were issued in 1962, and the
amount secured thereunder wholly advanced in respect of the project in
Thompson, Manitoba.
Financing of Daylite of Grand Bahama
Funds for Daylite of Grand Bahama, which had no capital during
the early period of operations on Grand Bahama Island, and specifically
between September 10 and December 31, 1963, were provided by Masco
Construction Company Limited. This company, during the period men-
tioned, had paid $109,600 to Dalite Corporation for salaries, travelling
expenses, engineering expenses and similar items incurred in the Luca-
yan operations, which was borrowed in turn from Dalite by Daylite of
Grand Bahama. One payment of $10,000 was made directly by Masco
Construction to Daylite of Grand Bahama and was repaid to the former
by Dalite in March of 1964. Masco Construction had by this time
ceased to intervene between the two companies, but it will be recalled
that this was the original purpose of its incorporators and that it had
derived its funds in the amount of $200,000 from C. P. Morgan, Allen
Manus and the Lucayan Beach Hotel Company, with $50,000 coming
from Morgan, $50,000 apparently from Allen Manus and $100,000
from the Hotel Company. The advances of Manus and the Hotel Com-
pany, which perhaps were both made by the latter, were paid by Daylite
of Grand Bahama from one of its two bank accounts in Freeport, early
in 1964, by Manus electing to offset the amount of $150,000 against the
amounts advanced to the Hotel Company by Daylite of Grand Bahama
for operating expenses. Subsequently Daylite of Grand Bahama got its
money through six bank accounts, of which two were at the Royal Bank
of Canada in Freeport, one for sterling and the other for U.S. dollars.1
Two were at the main branch of the Bank of Nova Scotia in Toronto,2
another at the Canadian Imperial Bank of Commerce, Bloor and Lans-
downe Streets in Toronto, designated as "Eugene Last building account",3
and yet another at the Canadian Imperial Bank of Commerce at Lake-
shore Boulevard and Seventh Street in New Toronto, in the name of
Nathan Saunders whose connection in this respect was originally with
Masco Construction.4 All except the Bank of Nova Scotia accounts
were directly concerned with payment of moneys for the Grand Bahama
Exhibits 3095-6.
■Exhibit 2860.
•Exhibit 3097.
♦Exhibit 3098.
619
Lucayan Beach and Dalite
projects and, generally speaking, Daylite of Grand Bahama obtained its
funds either from Nathan Saunders or Eugene Last. The operation of
the Saunders account for this purpose began in October 1963 and con-
cluded in early April 1964, after which the E. Last building account was
used instead up until the end of substantial construction on Grand
Bahama. Saunders would give a cheque to Daylite of Grand Bahama on
the site, and the company would deposit it in an account with the Royal
Bank at Freeport. His cheque would not be cleared in Toronto until
after the lapse of ten days to two weeks, whereupon Dalite Corporation
would issue a cheque in exactly the same amount for deposit into his
account to cover the cheque which had been cleared. The next day
Dalite would get a cheque from Commodore Sales Acceptance in the
same amount, or in some instances more to cover other cheques fall-
ing due on that day. Two signatures would appear on the Dalite cheques
to Saunders, one regularly being that of A. G. Woolfrey, and Commo-
dore Sales Acceptance would record the advance as an additional loan
to Dalite, charging it to inventory or operating loan accounts with that
company. Dalite, however, would record these advances as a charge to
the cost of sales expense account, as if it were paying the construction
costs at the site itself, instead of recording them as loans to Daylite of
Grand Bahama as might normally be expected. At the date of billing
from Dalite to Daylite of Grand Bahama, which was postponed until
completion of the project, or a substantial portion thereof, instead of
being coincidental with the individual shipments of material, payments
were recorded as a sale after having been carried as a cost of sale in
the interim. Since Dalite was paying 12% interest to Commodore Sales
Acceptance, these final billings would include factors for interest expense
and for overhead, as well as 10% over all, added for profit. Because
Daylite of Grand Bahama had the use of the money as soon as Saunders'
or Last's cheque was given to it, and Dalite Corporation did not have to
cover the cheque by payment into the appropriate account until it
cleared at Toronto, the latter in effect enjoyed an interest-free loan from
the bank during the interval, especially since its own billings to Daylite
of Grand Bahama included the interest payable to Commodore Sales
Acceptance.
The total amount of money paid into the Saunders bank account
by Dalite Corporation for use in the Bahamas was $665,153.21, of which
all but $345 found its way into the account of Daylite of Grand Bahama
at Freeport. A great deal more went into the E. Last building account,
being in sum $3,843,423.56, of which $60,423.46 was attributed to
expenses incurred directly by Last for travel and payments to sub-
contractors of Daylite of Grand Bahama, or so Dalite was informed.
The rest, in substance, appears to have been received by Daylite of Grand
Bahama, although an amount of approximately $30,000 has not been
620
Chapter IX
completely traced. This large expenditure on the part of Eugene Last
will require some further examination, since it was all incurred in the
course of a year from the spring of 1964 until the spring of 1965. The
E. Last building account, unlike the Saunders account, was used for
other purposes than to transmit money to Daylite of Grand Bahama. It
was the repository of rental payments made to Last for occupation of
the building at 300 Dwight Avenue as the source of payment of interest
and principal on the mortgage of that property to Hilltop Holdings; some
items appear to be purely personal. On the whole the system of controls
instituted by Commodore Sales Acceptance was elaborate, and, if
adhered to from the time it was set up in April 1964, would have been
adequate, provided that the invoices of Daylite of Grand Bahama were
genuine. C. P. Morgan sent men to Grand Bahama to watch the com-
pany's operations and to report back to him and either Harry Wagman
or Frank Cockburn, and the two who were permanently on this duty
were Nathan Saunders and R. W. Pollock, as already remarked. Wool-
frey at Commodore Sales Acceptance required Daylite of Grand Bahama
to supply invoices in support of every payment made out of the Freeport
bank accounts, and since there was a substantial lapse of time involved
in the clearing of the Saunders and Last cheques, he was in a position
to receive an invoice from Daylite of Grand Bahama before issuing
covering cheques to Dalite Corporation. A report of Cockburn dated
March 4, 1964,5 and a letter from him to Miss E. McCarthy of April 86
indicate that he was taking steps to have the books of Dalite Corpora-
tion brought up to date; its general ledger had not been entered since
November 30, 1964. Miss McCarthy, on her way to Freeport at that
time to represent Commodore Sales Acceptance on the staff of Daylite of
Grand Bahama, was instructed to mail a daily report to Toronto, listing
each cheque issued and attaching the relevant invoice or payroll list
and receipted copies of deposit slips. All invoices for payment through
Toronto were to be approved by Julian O'Reilly who was Last's super-
intendent and the practical head of the construction work. These in-
structions were complied with;7 all invoices approved by O'Reilly had to
be identified with the appropriate job number, and Daylite of Grand
Bahama's bank statements and cancelled cheques to be picked up as
early each month as possible and forwarded to Commodore Sales
Acceptance by registered mail. One can only guess what success Miss
McCarthy had with this uninviting task, but in late 1964, or early 1965,
Cockburn took up his residence on the island to watch the progress of
jobs at close range; thereafter the task of examining the invoices appar-
ently devolved upon Woolfrey.
"Exhibit 3106.
"Exhibit 3107.
'Exhibit 3108.
621
Lucayan Beach and Dalite
The Accounting of Eugene Last
The amount of $60,423.46, referred to above as having not been
paid to Daylite of Grand Bahama, but accounted for by Last as expenses
and invoices which he paid directly, was broken down as follows:
(1) Cheques between December 1963 and January 1965, totalling
$38,604.69, were issued for travelling expenses over this period of
fourteen months and supported by the normal type of travel
account and voucher, and the size of this item was in part attribut-
able to the fact that Last lived in Nassau, some 140 miles away from
the job site, to which he travelled daily and returned by air. In
Nassau he lived in style in the British Colonial Hotel and made an
additional claim of $17,000 for travelling expenses in June 1965
which was not paid.
(2) A payment of $10,449.89 by Dalite Corporation to Eugene Last
was charged to Grand Bahama job number 201, the construction
of the marina. There do not appear to be any invoices to sub-
stantiate this payment. On the same day as the deposit was made
in the E. Last building account a large cheque in the amount of
$5,500 was paid out to S. J. Hogg on January 8, 1965.1 The only
evidence before the Commission as to the reason for the payment
to Hogg was given by Hogg himself who testified before it on
February 17, 1967.2 In so far as Hogg's answers to Mr. Cart-
wright's questions on that occasion, and on this subject, are in-
telligible, it would appear that $3,000 of this amount was advanced
to James E. Thomson.3 Thomson, who may fairly be described as
a promoter in the literary rather than the technical sense of the
word, was at this time associated with Dalite Corporation in accord-
ance with a rather loose arrangement, whereby he was entitled to
receive commissions on business developed or sales made. Because
all of Dalite's funds were coming from Commodore Sales Accept-
ance and cheques had to be approved by Woolfrey, Thomson was
getting no remuneration at this point, because Woolfrey had con-
cluded that he was not entitled to any. Thus he was paid in an
irregular and improper manner at the expense of Commodore
Sales Acceptance, on representations that the money made available
was expenses incurred by Last. No part of the sum of $10,449.89
was deposited to the account of Daylite of Grand Bahama in
Freeport. The rest of the amount of $5,500 paid to Hogg was
described by him as an adjustment of personal loans made by him
to Last.
1Exhibit3109.
'Evidence Volume 98, pp. 13486-8.
•Exhibit 3996.
622
Chapter IX
(3) Payment of an amount of $11,955.15 was made to Eugene Last
on May 6, 1964 by Dalite cheque4 and deposited in the E. Last
building account.5 It is recorded in the Dalite cash disbursement
journal as a payment to E. Last re Pinder Plumbing. Pinder Plumb-
ing was a Bahamian firm and one of the sub-contractors working
for Daylite of Grand Bahama. Two invoices and a statement were
found in the files of Walton, Wagman & Co., the first invoice dated
April 20, 1964 for $5,000 directed to "Lucayan Beach Village
Ltd. Freeport, Grand Bahama",6 and the signature on it resembles
that of Julian O'Reilly. The second invoice is dated April 25, 1964
also directed to Lucayan Beach Village Ltd. from Pinder Plumbing
Co. Ltd. in the amount of $6,000. 7 Both invoices purport to be
for plumbing work done for job 202, the motel buildings. Accom-
panying these in the accountant's file is a hand-written memo-
randum to "Bob" from Cockburn dated November 3, 1964, headed
"Subject: Pinder Plumbing Company Limited",8 which says "Bob:
Please obtain for us a statement from Pinder Plumbing covering
their contract on job 202. For your confidential information our
records indicate payment of $6,000 April 25/64 and $5,000 April
20/64. These payments do not show on a statement dated August
4th. Suggest you request routine statement for internal audit pur-
poses and report to us. Frank". Also among the papers is a state-
ment from Pinder Plumbing, dated August 4, 1964 and addressed
to Daylite of Grand Bahama, referring to a contract price of
£.10,125 and showing a balance left unpaid of £, 1,01 3. 9 It itemizes
six payments already made and there is no mention in it of either
of the two invoices referred to in dollar amounts. A work sheet
from the Walton, Wagman & Co. files, prepared for purposes of
reconciliation of the Pinder Plumbing account referring specifically
to job numbers, shows the total Pinder billings as amounting to
$42,204.91 and that Daylite of Grand Bahama had paid the com-
pany $42,102.13 at a conversion rate of $2.80 per U.S. dollar. Last
did not pay Pinder Plumbing but did pay E. D. Sassoon Banking
Company by two cheques, both dated April 26, 1964, for $6,000
and $5,000 in U.S. funds,10 which at the time was, in aggregate,
the exact equivalent of $11,955.15 in Canadian funds. The par-
ticulars of the payment made by Dalite Corporation are "re Pinder
Plumbing." In response to inquiries made by the Commission the
'Exhibit 3110.
'Exhibit 3097.
-Exhibit 3111.
'Exhibit 3112.
•Exhibit 3113.
•Exhibit 3114.
"Exhibits 3116-7.
623
Lucayan Beach and Dalite
following letter, dated September 13, 1966, was received from R. W.
Pinder:11
"I have been informed that Daylite of Grand Bahama Company,
Limited was invoiced by Pinder's Plumbing Ltd. as follows:
April 25, 1964 $6,000.00
April 20, 1964 $5,000.00
I wish to confirm that these invoices did not originate from my office
and payment of the amounts specified were not received or accepted by
me.
The writer then, apparently for greater emphasis and certainty
bracketed "amounts specified were not received or accepted by me"
and added in his own hand "the above amount shown, was by no means
received by me or the above mentions company," and signed "R. W.
Pinder." At the foot of the page there are the words "witness: F. K. Cock-
burn, P.O. Box 298, Freeport, Bahamas" and the recognizable signature
of F. K. Cockburn is appended.
The facts of this third piece of business, as then ascertained, were
put to Eugene Last on the second day of his testimony before the Com-
mission.12 Before proceeding with his explanation he asked, for the first
time, through his counsel Mr. J. D. Honsberger, Q.C., for the protection
of section 5 of the Canada Evidence Act and section 9 of the Evidence
Act (Ontario). His explanation was that Allen Manus had come to him
and asked first for $5,000, and then a few hours later for a total of
$ 1 1 ,000 to cover payments which he had to make at the Sassoon Bank,
and that Manus had his pilot standing by to fly him to Nassau with the
cheques. He said further that Pinder always used the Daylite of Grand
Bahama office to have his invoices typed and that the invoices in ques-
tion were in fact progress invoices which were subsequently cancelled.
Manus had said that he only required the money for two days, and that
he needed it to pay Pinder and some others on behalf of Daylite of
Grand Bahama within the same two days. This conversation occurred
on April 26, and by April 28 Last must have been aware that Manus
had not paid Pinder Plumbing. He was quite unable to explain why he
had caused Dalite Corporation, as late as May 6, to record the payment
made into his building account as relating to Pinder invoices, or gener-
ally why the cheques to the Sassoon Bank had not been simply recorded
as an advance to Allen Manus. After a good deal of persistent ques-
tioning to which few satisfactory or, indeed, credible answers were given,
Mr. Shepherd concluded his examination of Last as follows:13
"Q. Well, Mr. Last, all I want to get is your explanation. Is it your
explanation that Mr. Manus asked you first for $5,000 and then
$11,000. Is that right?
A. Five and six.
"Exhibit 3118.
"Evidence Volume 65.
"Evidence Volume 65, pp. 8859-65.
624
Chapter IX
Q. Five and six, two separate cheques?
A. First he came with six; then he, a few hours later, asked for $5,000
in addition.
Q. So as I understand your evidence you caused to be typed up in the
office of Daylite (Grand Bahama) an invoice from Pinder Plumbing for
$5,000 and one for $6,000. Is that correct?
A. No. Those invoices were actually progress invoices what we received
from Pinder's, which he eventually cancelled, and those were the in-
voices that I wanted him to cover in two or three days.
Q. Is the position then that the time that Mr. Manus asked you for
$5,000 and then, a matter of hours later, for $6,000, you just happened
to have, in Daylite of Grand Bahama's office, an invoice from Pinder
Plumbing for $5,000 and an invoice for $6,000?
A. This is April 25th and April —
Q. 20th.
A. 20th.
Q. Is that correct?
A. Yes.
Q. So Daylite (Grand Bahama) have in their office proper valid in-
voices, one is for $5,000 and one is for $6,000, from Pinder Plumbing,
and those are honest invoices; is that correct?
A. I am sure of that.
Q. Mr. Manus came in and, as it fell out, he happened to want to
borrow two different sums of money, one was $5,000 and the other was
$6,000. Is that correct?
A. Right.
Q. And it happened that the amounts of money which he wished to
borrow and the denominations in which he wished to borrow it. just
happened to coincide exactly with the invoices which Daylite ( Grand
Bahama) had in their possession from Pinder?
A. Right.
O. Ts that right9
A. Yes.
Q. You then write two cheques payable to the 1". D. Sassoon Rank on
Mr. Manus's direction0
A. Yes.
Q. And you do this on the 26th o( April, is that correct?
A. Yes.
Q. Mr. Manus was supposed to pay you back, or he was supposed to
pay Mr. Pinder within. 1 think you said, two days, and on another occa-
sion you said a couple of days'1
A. He said a couple o\' days.
625
Lucayan Beach and Dalite
Q. And he did not pay it?
A. Right.
Q. On the 6th of May Dalite (Canada) writes a cheque to your account,
that being the day on which those cheques cleared, for sufficient funds
to cover those cheques, and they record that advance, not as being an
advance to Mr. Manus, but in payment of Pinder invoices; is that
correct?
A. Right.
Q. Now, it is quite clear, is it not, that everybody must have known by
then that this was not a payment to Pinder Plumbing?
A. By the 10th?
Q. By the 6th of May?
A. Oh, by the 6th of May, but I was not back to straighten out at this
end.
Q. When did you come back?
A. Gosh, I could not tell you.
Q. Shortly thereafter?
A. A week or two weeks later.
Q. I am sure one of your first acts would be to straighten out these
records which, unstraightened, would be capable of an unfavourable
construction to you. Did you tell people to correct that: 'this is not
true, that is not a payment to Pinder, that is a payment to Manus'. Did
you do that?
A. Right.
Q. And why did they not correct it?
A. With all the problems that I had at the time do you think you can
keep everything in mind?
Q. But you remember telling them to correct it?
A. I remember telling the girl to send a letter attached to correct it.
Q. To whom was she going to send this letter?
A. To the Toronto office.
Q. You remember telling the girl? Where, in the Bahamas?
A. In Freeport.
Q. Oh, I see. The books, though, were kept — the books to which I
refer, where it was recorded that this was a payment to Pinder Plumb-
ing which had been paid by you, they were kept at Dalite (Canada).
Those books were not corrected?
A. What about the books in Freeport?
Q. Now, that is a good question, Mr. Last. What about the books at
Toronto which record, in the proper place for it to be recorded, that
626
Chapter IX
when Dalite (Canada) wrote a cheque to you to cover those cheques,
Dalite (Canada) recorded that that money had been paid to Pinder
Plumbing and charged it to the motel. Why was that entry never cor-
rected, if the facts were as you have related them?
A. That should have been corrected here in Toronto, which was in
Commodore's office, because the books of Daylite (Grand Bahama)
were kept in Commodore's office by Mr. Woolfrey — by Mr. Cockburn,
I believe.
Q. Then do you say first that those very invoices now admitted into
evidence as Exhibits 3111 and 3112 were, to your knowledge, invoices
sent to Daylite (Grand Bahama) or to Lucayan Beach by Pinder
Plumbing, drawn by Pinder Plumbing in the full expectation that those
invoices would be paid? Is that correct?
A. Right.
Q. Then do you say that these invoices were paid in the sense that
the same sum of money was later put together with other sums of
money and an invoice submitted for a different but higher amount?
A. Yes, I believe there was a credit issued on those two invoices and
new invoices submitted.
Q. I show you, Mr. Last. Exhibit 3114, which is a statement of Pinder
Plumbing, dated the 4th of August, 1964, some months after those
mvoices, setting out the various invoicing for the whole of their con-
tract. The statement does not include those invoices. Which invoice,
subsequent to the 25th of April, is the invoice which includes $11,000
American?
A. Well, I said there should be a credit there. (Indicating) I don't
know how they worked it out after.
Q. You told me that later there were other invoices which included the
sum of these two, and when I look over their statement I see no invoice
subsequent to the 25th of April which could possibly include those,
because none amount to —
A. I don't know, because this is based on Job 202, this is Job 202,
and this is Job 204. (Indicating.)
Q. Have you been afforded an opportunity to make a full explanation,
and is that the explanation? Or do you wish to go into it any further
than that?
A. Well, it's very hard to recollect everything right now."
Last said that two boats belonging to Manus had to be "repossessed" in
connection with these advances, but since there was a well-defined pro-
cedure for making loans to the Hotel Company, or Manus. from Daylite
of Grand Bahama without resorting to false invoices, Last's explanation
must be considered a fabrication. In a private and confidential report by
627
Lucayan Beach and Dalite
Pollock to C. P. Morgan dated October 23, 1964 there appeared the
following comment:
"Mr. Eugene Last has, as you are now aware, been far from co-
operative. It would appear that in spite of any discussions you have
had with him, he has been under the impression that my work here
would be of a very brief and temporary nature. The situation developed
into a crisis last Monday when he apparently learned of my investiga-
tions, and the type of information I was requiring. Upon my return
from Nassau, I was confronted by an unpardonable public outburst,
which prompted my immediate phone call to you. He stated emphat-
ically to others, that he does not propose to have any Accountant sent
by yourself, on this Island. Close associates of his, had since informed
me that such an outburst is a method used by Mr. Last on other occa-
sions for similar obstruction to anyone opposing his personal interests.
This merely confirms your anxiety regarding your own interests in
Freeport."
By January 20, 1965 Last had apparently triumphed, and Cockburn, in
a report of that date sent from Grand Bahama, discussed the problem of
Pollock's disposal and the termination of his employment as at December
31, 1964. The following comment is relevant to the Pinder Plumbing
transaction:14
"We had more discussions with Mr. Pollock and must conclude that
he was obtaining too much dangerous information.
He was asked by me to look into certain invoices totalling $11,000
issued by Pinder Plumbing. I was informed that these were indeed
phony invoices and that the money was used to purchase two boats
from Mr. A. Manus which would be valued at no more than $4,000.00."
These communications are material because they show quite clearly that
Morgan's organization both in Toronto and on the island was in posses-
sion of information that must have convinced Morgan of Last's dis-
honesty, assuming that he had not taken his measure long before. It has
been seen, however, that Morgan was in no position to sever his connec-
tion with Last with safety to himself, and the shareholders and creditors
of Atlantic Acceptance were to suffer, as in many other instances, from
this enforced tolerance of fraud.
Inflated Billings as an Element of Dalite's Losses
At this point there must be examined, in accordance with the evi-
dence given to the Commission, the reasons for the magnitude of the
losses incurred by Dalite Corporation in its transactions with Daylite of
Grand Bahama. Set out on Table 49 l is an analysis of the Lucayan
"Commission file: Reports by Chartered Management Consultants (Canada) Limited.
'Exhibit 3119.
628
Chapter IX
project in terms of billings and costs. The analysis is based on budgets
and feasibility reports of the various projects, the first column setting out
the job number, the second column describing it and the third column,
entitled "Original Construction Budget or Estimate", indicating what the
management of Dalite Corporation expected each of the projects to cost
from their inception, in spite of afterthoughts expressed by Eugene Last.
The fourth column shows the total of the invoices sent to Daylite of
Grand Bahama and asserted to be the cost of the projects after com-
pletion plus the additional factors referred to, and the fifth column shows
additional liabilities that Daylite of Grand Bahama had incurred, not
included in billings by Dalite Corporation and not paid for by that
company. The sixth column is the sum of the fourth and fifth columns,
entitled "Total Value Asserted by the Dalite Group", and the seventh
column shows the value certified, including the profit margin, by the
consulting engineers, Duncan Hopper & Associates, in their completion
certificates. The eighth column shows the sale price of the construction
accepted by the Lucayan Beach Hotel Company, before and after the
Atlantic collapse, in U.S. dollars and actually paid for those items which
were purchased. The ninth column — "Proceeds from Other Sales or
Claims Outstanding in U.S. Dollars" — shows values attributed to assets
by the receiver and manager or obtained on sales; it includes assets that
were apparently gifts to the Hotel Company by Daylite of Grand Bahama
and for which there may be claims by that company against it. Finally
the tenth column, entitled "Apparent Excess Billings by Dalite Corp.", in
Canadian dollars shows the amounts by which Dalite Corporation
invoices exceed the amounts of money for which the assets were actually
sold, or for which they are now valued.
The 110 efficiency units, referred to so often in this account, taken
together, were the first project that Dalite Corporation and Daylite of
Grand Bahama embarked upon; job 203 was the number assigned to the
first group of 60, and job 204 to the second group of 50. In the files of
Walton, Wagman & Co. was found a memorandum headed "Budget —
Bahama Project" which is evidence as to what initially the construction
of these units was believed to be going to cost.2 The estimate for the 60
units was $270,096, the cost per unit being shown as $4,501.60. Below
the cost per unit there is written "S.P. $6,300". If "S.P." means sale
price, as one might expect, it would constitute a mark-up of 40 rr.
There is no separate budget for the extra 50 efficiency units, but since
they were all built at substantially the same time, it is fair to assume that
the unit cost was, or would have been, budgeted in the same amount,
giving an aggregate cost for 110 units of $495,176. The total amount
of the invoices sent to Daylite of Grand Bahama in respect of this proj-
ect at the end of 1964 was $1,589,760. and this was over 300% of the
"Exhibit 3120.
629
Lucayan Beach and Dalite
budget. It will be recalled that on the completion of the units Daylite of
Grand Bahama was not paid for them, but rented them to the Hotel
Company for sixty months at $16,500 per month, providing a total of
$990,000 in U.S. funds for the term of the lease. Daylite of Grand
Bahama never paid these invoices in the aggregate, although some partial
payments were made through book-keeping entries made by Commodore
Sales Acceptance when that company changed its debtor from Dalite
Corporation to Hugo Oppenheim und Sohn, and arbitrarily allotted the
reduction in the total debt of Dalite Corporation to specific job numbers
in its accounts. No money changed hands. The records of Duncan
Hopper & Associates contain copies of completion certificates furnished
to Dalite Corporation indicating costs based on information supplied by
the company, although no originals or copies have been found in the
company's files. These are headed "COMPLETION CERTIFICATE
PROJECT 203 and 204"3 and constitute a summary of what Dalite
Corporation and Duncan Hopper & Associates estimated that the effi-
ciency units cost, saying: "These costs have been summarized from data
provided by the contractors on completion of the project." The esti-
mate, which cannot be considered an independent appraisal, is for
$1,512,276.56. The detailed summary is as follows:
In Plant Costs
75 Efficiencies $ 465,575.00
35 Efficiencies $ 221,755.00
On Site Costs
75 Efficiencies $ 251,874.50
35 Efficiencies $ 140,600.00
$1,079,804.50
4% Engineering Design and Supervision $ 43,196.16
$1,123,000.66
5% Travelling $ 56,155.03
$1,179,155.69
7% Financing $ 82,547.90
$1,261,703.59
Land Value and Cost $ 47,613.34
$1,309,316.93
5% Overhead (Legal etc.) $ 65,470.85
$1,374,787.78
10% Profit $ 137,488.78
TOTAL $1,512,276.56
•Exhibit 3121.
630
Chapter EX
In the "On Site Costs" Dalite Corporation included the amounts relating
to the efficiency units which it borrowed from Commodore Sales Accept-
ance and sent to Daylite of Grand Bahama, recording this as cost of
sales. These amounts are included in the bill to Daylite of Grand
Bahama, together with the various percentages for engineering, travel-
ling, financing, overhead and profit. It must be assumed that the expres-
sion: "Land Value and Cost" should have been written: "Land Value
at Cost" and may include legal expenses. There is no explanation as to
why Daylite of Grand Bahama was billed some $77,000 more than this
amount, and no contract or any other document setting out the basis
upon which Dalite Corporation was supposed to calculate its invoices
to Daylite of Grand Bahama has been found, or can be assumed to exist.
No budget documents were found by Mr. Wolfman relating to job
number 205 which was construction of 40 apartment units with a
swimming pool on Hong Kong Island. The Duncan Hopper & Associates
completion certificate, however, exists and it is in the amount of $750,-
177.63,4 but Dalite Corporation billed Daylite of Grand Bahama in the
amount of $810,000. The completion certificate takes into account all
the percentages added on in the case of the efficiency units and includes
an item for the cost of land. There would not appear to be any rational
justification for the addition of almost $60,000 to the amount calculated
in the completion certificate. Job 201, the marina with 126 slips and
a boat repairing yard, was the subject of a feasibility report by Duncan
Hopper & Associates5 in which the total estimated cost as at January 6,
1964 was $1,091,031.20. This included a full description of all the
components of the marina, and the structure was built in accordance
with a detailed and estimated plan made independently by the engineers.
Dalite Corporation actually billed Daylite of Grand Bahama $1,091,000,
but the latter also assumed: first, the liability to Five Wheels for 3% of
the gross profits and the use of six slips for 30 years, subsequently valued
at $648,000, or $600,000 in U.S. funds when finally compounded
by the trustee; second, costs in the amount of $325,000 incurred by
Five Wheels; and third, liability for the advance of $100,000 by the
Grand Bahama Development Company to Five Wheels, all of which
have been referred to. The Duncan Hopper estimate includes dredging
and other work for which Daylite of Grand Bahama paid Five Wheels.
The direct cost of building the marina was $2,416,000 and the
engineers completion certificate for project 201 is in the amount of
$2,188,572.50.°
All the projects referred to thus far were sold by Daylite of Grand
Bahama to the Lucayan Beach Hotel Company. The sum of the invoices
sent by Dalite Corporation to Daylite of Grand Bahama, added to the
♦Exhibit 3122.
"Exhibit 3123.
•Exhibit 3124.
631
Lucayan Beach and Dalite
indebtedness or liabilities which the latter acquired for the benefit of
Five Wheels, was $5,463,000 in Canadian funds. Initially Daylite of
Grand Bahama sold them to the Hotel Company for $3,888,000 which,
as has been seen, was added to after the collapse of Atlantic by the
receiver and manager to the extent of $400,000 in favour of Daylite of
Grand Bahama at the Hotel Company's expense, although the settle-
ment with Five Wheels did not involve the payment of any money
since the shares of that company held by Associated Canadian Holdings
were exchanged for the debentures originally issued to it.
According to the evidence of Eugene Last, he had been involved
in the marina project from the start. Shelman had asked him to prepare
the tenders for its construction in the summer of 1963 while dredging
was still being undertaken by Freeport Construction Company, and they
were called by Last in Miami. The successful tender was that of Latham
Construction Company, but it required $100,000 as "mobilization fees"
which Shelman could not produce. Last obtained this from the Grand
Bahama Development Company for Five Wheels by personally nego-
tiating the advance with James E. Maher, the Development Company's
executive vice-president. He said that he was anxious at this point to
see the marina contract disposed of, but not to Daylite of Grand Bahama.
However, Morgan told him that both Manus and himself held an interest
in Five Wheels, and he suggested that this might have had something
to do with the favourable terms given to Five Wheels of Grand Bahama
by Daylite of Grand Bahama in acquiring the site and the contract.
Maher's recollection, given to the Commission on March 14, 1968 in
Florida, was that Five Wheels was thrust out of the contract over the
strenuous objection of Shelman.
Job 202 was the motel, consisting of 100 rooms, a shopping area,
service buildings and swimming pool, and the budget documents7 con-
tain an estimate of $841,704 as the cost of construction, calculating the
gross profit at $1,050,000 minus this sum, or $208,296. Daylite of
Grand Bahama had committed itself to build and sell the motel complex
to the Lucayan Beach Hotel Company for $1,350,000, but the invoices
sent by Dalite Corporation to Daylite of Grand Bahama for job 202,
added together, provide a total billing of $3,348,000. The Duncan
Hopper completion certificate for this project8 was for $3,225,151.60,
but the records are so fragmentary that it is impossible to say how
much Dalite Corporation really laid out for its construction. As in the
case of other projects, no originals of the completion certificates have
been found, and the available copies are not addressed to anybody in
particular, being used by Duncan Hopper & Associates to compute their
engineering billing of 4% of cost. Last stubbornly maintained in his
evidence before the Commission that, although the original arrange-
7Exhibit 3120.
8Exhibit 3125.
632
Chapter IX
ment for payment for the motel complex at cost plus 10% had been
changed to the fixed price of $1,350,000 in U.S. funds, with $150,000
payable at once and the balance of $1,200,000 on completion, and
changed again to postpone the $150,000 payment to the date of com-
pletion,9 it had been agreed to revert to the cost plus 10% basis, exclu-
sive of the furnishings, on Allen Manus' insistence because he did not
approve of the plans and required changes on behalf of the Lucayan
Village Company. He said that this decision was embodied in a letter
prepared by Mr. B. W. N. Apple of Salter, Reilly & Co., that it had
been signed by himself for Daylite of Grand Bahama and Manus for
Lucayan Village, and had been given to Morgan. He said further that
he had protested to Morgan when the Lucayan Beach Hotel prospectus
referred to a contract price of $1,350,000 and said that the motel could
not possibly be finished for this figure. All the evidence and, indeed,
the recollection of Mr. Apple militate against Last's view of the trans-
action, including the fact that $1,350,000, plus $75,000 for extras, was
paid in July, 1964 by the Lucayan Beach Hotel Company and was all
that was paid on behalf of Lucayan Village. He admitted that he had
not made any attempt to collect from that company on a cost plus basis,
but that at the opening of the motel, when Manus had come to him
to borrow $55,000 for pre-opening expenses, he had given him a
final figure of close to $3,000,000, at which point Manus had "started
screaming" and had refused to talk to him during the ceremony, except
to say that he would straighten out everything with Morgan. The story
about the reversion to cost plus 10% for the motel and its ancillary
works may well have been used by Last to justify the excessive billing
by Dalite Corporation to Daylite of Grand Bahama and to rectify a
serious miscalculation, but it would appear to be apocryphal.
The Drivers' Club was described by Last as a "native club" in
Freeport, presumably to distinguish it from the large tourist establish-
ments. No job number was allotted to it and no budget exists. It seems
to have been constructed on the side as a portion of the motel project,
although by no means contiguous physically, and the Commodore Sales
Acceptance people, with the possible exception of Morgan, did not
know, at least in the early stages, that it was being built. It was origin-
ally built for a company called Bahama Entertainment Limited, owned
by two Americans named Kellinson and Irwin, and, according to
Last, Allen Manus and Nathan Saunders were their partners. The club
was originally planned as a modest affair and derived its name from an
attached facility for racing small vehicles called "go-karts". Last said
he was at one time a director of Bahama Entertainment Limited and
that R. W. Pollock also had an interest, but it is more likely that
Pollock's interest was in trying to control the costs of construction and
"Exhibits 2610.5 and 2610.6.
633
Lucayan Beach and Dalite
operation. Kellinson, who was a friend of Morgan according to Last,
and Irwin, who bought stock in Molly Corporation and the Lucayan
3each Hotel Company, and in consequence may have once been a
friend of Allen Manus, were bought out by payment of $15,000 of
Daylite of Grand Bahama money early in 1965; thereafter Saunders
managed the club and asserted that Morgan had given him a 50%
interest in Bahama Entertainment. Its estimated value of $40,000 after
the collapse of Atlantic is quite inconsistent with the total billings in
respect of its construction made by Dalite Corporation to Daylite of
Grand Bahama in the amount of $216,000.
The remaining projects, with the exception of that of the Interna-
tional Aviation Club, which will be dealt with more fully, were job 205A,
a laundry, or "laundromat", constructed in the apartment area which
Dalite Corporation invoiced at $43,250, and which Lucayan Beach
Hotel and Development acquired at a valuation of $30,000 after the
Atlantic collapse; the sewage treatment plant, invoiced by Dalite Corpo-
ration at $200,000 and acquired by the Hotel Company, also after the
collapse, for $160,000; the electric sub-station, invoiced at $118,135,
and after the collapse acquired by the Hotel Company at a value of
$15,000, possibly arrived at by taking into account the adjustment in
favour of Daylite of Grand Bahama of $400,000 already referred to;
the tennis court, billed at $25,166 and acquired after the collapse by
the Hotel Company for $17,350; all of these were apparently under-
taken without budgets, estimates or contracts. A model house, intended
for display on a tract of land bought by Daylite of Grand Bahama,
which planned to build a number of similar houses for sale, was con-
structed from prefabricated parts supplied by Dalite Corporation and
charged to Daylite of Grand Bahama in the amount of $43,200; after
the collapse it was sold for $30,00 by the receiver and manager.
For all the construction carried out at Lucaya and in Freeport —
and this excludes what is described as "other projects" on Table 49 —
the total billings by Dalite Corporation to Daylite of Grand Bahama
amounted to $8,384,511; the sum of the additional indebtedness in-
curred by Daylite of Grand Bahama in respect of construction was
$1,073,000; so that the total value asserted by the "Dalite group" was
$9,457,511 against a realization after the collapse of Atlantic Accept-
ance of $6,552,350, which includes $70,000 for unrealized assets like
the Drivers' Club. The excess of Dalite Corporation invoicing over
Daylite of Grand Bahama realization, before and after the collapse,
amounted to $2,591,211 in Canadian funds. It is impossible to say
how much money Commodore Sales Acceptance advanced in respect
of each particular job, because, when it did so to Dalite Corporation,
it recorded an inventory and operating expense loan, and when the
latter sent invoices to Daylite of Grand Bahama, copies of which were
sent to Commodore Sales Acceptance, the inventory loan was reduced
634
Chapter IX
and a specific "project account" was set up in an amount exactly equal
to whatever amount Dalite Corporation saw fit to bill. When, for
instance, the loan by Commodore Sales Acceptance to Dalite Corpo-
ration was reduced by more than half, as a result of the transaction
already described which substituted Hugo Oppenheim und Sohn as
debtor for Dalite, the amount of the reduction was shown as a credit
in a credit account, thus making clear the inability of Commodore
Sales Acceptance to allocate accounts to particular construction jobs.
The total of all the invoices which Dalite Corporation sent to Daylite
of Grand Bahama, including those for advances of something in the
order of $2,000,000 to Lucayan Beach Hotel and Development, is shown
on Table 49 as $12,1 19,455, and the fact that the highest amount of the
loan shown as outstanding from Dalite Corporation to Commodore Sales
Acceptance on Table 45 was approximately $7,350,000 emphasizes the
extent to which Dalite Corporation billing was excessive; although, since
Commodore Sales Acceptance was financing both overhead and invoicing
most of the time, the difference cannot be explained by any comprehen-
sible system of calculation. I am compelled to conclude that much of this
billing was completely capricious and involved massive duplications, the
most signal example of which is the amount of $3,582,000 entered on
the books of Dalite Corporation as an account receivable from Daylite of
Grand Bahama and Lucayan Beach Hotel and Development on June 30,
1965, and which is in great measure responsible for the total of exces-
sive billing shown on Table 49 in the amount of $4,452,794.
The building lots on which Daylite of Grand Bahama proposed to
build Dalite houses cost $212,355 and were disposed of. one misht
think, improvidently in view of the rapid development of the area, for
$170,000. Dalite Corporation, which advanced the funds to buy them,
billed Daylite of Grand Bahama in the usual way, and charged this
amount against its costs of sales expense, which makes no accounting
sense at all. Another deposit put down by Daylite of Grand Bahama
to acquire land in the amount of $11,935 was apparently only given a
value of $5,000 by the receiver and manager, and a 99-year lease on
service station land, for which Daylite of Grand Bahama is alleged to
have paid $27,125, was not given any value at all; it would appear that
the lease was cancelled.
The advances and apparent gifts made by Daylite of Grand Bahama
to the Hotel Company have already been referred to in some detail. In
fact during the early part of 1964 the Hotel Company was largely de-
pendent upon Daylite of Grand Bahama for operating funds. Although
Dalite Corporation provided all the money which Daylite of Grand
Bahama advanced, having borrowed it from Commodore Sales Accept-
ance, the Hotel Company was at all times dealing with Daylite of
635
Lucayan Beach and Dalite
Grand Bahama to which it gave worthless cheques drawn, as has al-
ready been described, on its account with British Mortgage & Trust
Company in Toronto. Dalite Corporation at one point sent invoices to
the Hotel Company for the total amount in respect of these advances
of $2,083,463. Of this amount $515,935 was nothing but a duplication
of invoicing, since it had already been set up in an advance account.
The billing of June 30, 1965, mentioned above, included an additional
$1,500,000 attributed to advances made to the Hotel Company, and
appears to be as invalid as that for rental of the efficiency units at
$157,325 which Dalite Corporation did not own. Table 49 shows
repayment by the Hotel Company in the amount of $682,000, although
not specifically against these invoices, and the amount of $450,000 in
the succeeding column represents the gifts made by Daylite of Grand
Bahama to it in respect of settlements made with it, or on its behalf.
According to Eugene Last, the amount of $250,000 which Daylite of
Grand Bahama paid the Grand Bahama Development Company on
behalf of the Lucayan Beach Hotel Company, specifically releasing the
latter from any obligation to repay, was paid, at the behest of Allen
Manus and with the approval of C. P. Morgan, to avoid making a false
statement in the latter company's prospectus, in which no reference to
this liability to the Development Company was made. Of course the
amount of money apparently donated by Daylite of Grand Bahama to
the Hotel Company, shown as $450,000, came directly from Dalite
Corporation and indirectly from Commodore Sales Acceptance, and
there is no evidence that any gift was made by Dalite Corporation to
Daylite of Grand Bahama. Thus the amount is included in the table
as potentially recoverable, since the debt is apparently outstanding
between Dalite Corporation and Daylite of Grand Bahama.
Included in the invoices issued by Dalite Corporation on June 30,
1965 was one for $502,393 for interest, to which no recoverable value
was attributed on Table 49. This invoice must have been issued in
terrorem, since Dalite Corporation had already included its interest
factor in the invoices directed to Daylite of Grand Bahama. Similarly
the miscellaneous expense charge of $53,719, which purported to rep-
resent charges for travel and promotion, is not related to any agreement
between Dalite Corporation and Daylite of Grand Bahama, and can-
not be considered in any sense as recoverable. It is separate from
Eugene Last's additional bill of $17,000, and it may well be that the
management of Dalite Corporation attempted by this billing to recover
from Daylite of Grand Bahama all the travel expenses made by every-
body concerned with its own operations.
To summarize consideration of Table 49, it appears that Dalite
Corporation billed Daylite of Grand Bahama and the Lucayan Beach
Hotel Company just over $12,000,000, of which approximately $4,450,-
000 proved to be excessive as duplicate billings unsupported by the
636
Chapter IX
facts, and therefore not taken into account in Mr. Wolfman's financial
statement for Dalite Corporation as at the date of its bankruptcy on
August 31, 1965.
Inflated Sales of Dalite Corporation and their Significance
One explanation for the excessive billings which have just been
discussed may be found in documents taken from C. P. Morgan's
office by the Commission's investigators, which include an unsigned
agreement prepared for an unspecified date in March, 1965 between
Morgan, Last, J. E. Thomson and S. J. Hogg, the last being described
as executive vice-president of Dalite Corporation.1 Although it was never
implemented and it is difficult to believe that Morgan could have taken
his three associates seriously, it must be remembered that his principal
concern at this point was to free Atlantic Acceptance from the entangle-
ments of its mounting industrial loans in which his self-imposed role of
"secondary banker" had caused it to be enmeshed. The parties were
said to agree as follows:
"It is the purpose of this Agreement to identify various interests of
the parties hereto, and to merge these interests and assets as set out
below, into one holding corporation in which each of the parties hereto
shall hold a 25 % interest.
In order to accomplish the purpose outlined above necessary promo-
tion and development funds shall be provided through a Nassau cor-
poration for the use of the parties hereto.
It is also agreed by all parties hereto that the following Companies
being Dalite Corporation (Canada) Limited, Dalite Company of Dela-
ware Limited, and Daylite Company of Grand Bahama Limited, shall be
completely discharged of all liabilities to either or both Atlantic Accept-
ance Corporation Limited and/or Commodore Acceptance Corpora-
tion Limited.
The assets and interests referred to are as follows:
1) Dalite Corporation (Canada) Limited
2) Dalite Company of Delaware Limited
3) Daylite Company of Grand Bahama Limited
4) Daylite Engineering
5) Inter Avia Limited
6) Lucaya Marina Limited
7) Contracts with Congress Inns Incorporated
a) Nassau
b) St. Martins
c) Huntsville
d) Kitchener - Windsor
8) Contract Government of Peru
Exhibit 3126.
637
Lucayan Beach and Dalite
It is the further intention of the parties to include any and all con-
tracts and interests in Corporations pertaining to Dalite activities in all
spheres of the world.
In addition certain other specific programmes, presently in effect
or under negotiation by the parties hereto other than direct Dalite
activities, shall be included in the holding company referred to, i.e.
1) Casino operation — Grand Bahama Island
2) Private Bank — St. Kitts — British West Indies
3) Insurance Agency — Nassau and Freeport
4) Shares in Public Company that will hold Dalite Corporation
(Canada) Limited
5) Collection Agency participation — Toronto — Ottawa — Montreal
In summation, the parties hereto agree that all decisions with respect
to the payment of salaries — expenses and dividends shall be made by
the majority of the four at future regular company meetings.
Approved and signed at Toronto, this day of March,
1965.
C. P. Morgan E. Last
J. E. Thomson S. J. Hogg"
This grandiose conception emanated from the Dalite office and not
from the somewhat more sophisticated atmosphere of 100 Adelaide
Street West. Another document found in the Wagman, Fruitman &
Lando files2 is a memorandum on the public financing of Daylite of
Grand Bahama Limited, also undated, so that it is not possible to say
that it is contemporaneous with the contemplated agreement of March,
1965. It envisaged a public company with an authorized capital of
200,000 shares valued at $5.50 per share. Nothing was ever done about
this proposal either, but the excessive billings of Dalite Corporation to
Daylite of Grand Bahama would have transformed the financial state-
ment of the former when treated as sales revenue, changing the position
of loss to one of profit, and wiping out the deficit existing prior to the
Grand Bahama undertaking and any deficit incurred as a result of it;
indeed a surplus position could have been shown as a starting point for
any public offering of shares. Another scheme, about which Eugene
Last gave evidence to the Commission, was seriously considered in May
of 1965 and must be referred to again. A tantalizing glimpse of the
type of information being offered to the public, or to persons interested
in inquiring into the stability of Dalite Corporation in 1964 and 1965,
is provided by a copy of a credit report found in the files of Commo-
dore Sales Acceptance, made by a firm which is not identified because
its name does not appear on the copy found.3 It begins by giving total
•Exhibit 3127.
•Exhibit 3128.
638
Chapter IX
sales figures for Dalite Corporation of $30,000,000, goes on to say
that trade payment is slow and then, under the heading "Finance",
proceeds:
"October 13, 1964, Eugene Last, President, declined financial state-
ment however during course of conversation, the following figures
were obtained:
Accts. Rec $4,000,000 + Accts. Payable $300,000
Mdse 750,000 Owing Commodore
Fixt & Equip 750,000 Ace 750,000+
CAPITAL STOCK .... 47,030
When previously interviewed, November 5, 1963, Eugene Last stated
that he expected volume for fiscal year 1963 to be between $35,000,000
and $50,000,000. He stated during current interview that company
had not quite reached this level however volume is expected to continue
steady at slightly over $30,000,000."
In fact the volume of sales for Dalite Corporation for the six-year period
prior to the summer of 1965 was something in the order of $15,000,000
all told, and for the year ended December 31, 1963, which would have
been the latest date for a financial statement to which reference might
have been made had it not been "declined" to the author of the report,
the volume of sales was approximately $1,709,000. It should, of course,
be said that this document is only evidence of the information that
might have been available to the public at the time, and is not evidence
that Last was accurately reported. All attempts by the Commission's
investigators to identify the author, or the firm which employed him,
have been unsuccessful.
Embellishment of "Aquila HI"
No one in fact was more closely connected with the projects on
Grand Bahama to which Dalite Corporation and Daylite of Grand
Bahama were committed than Eugene Last. In spite of every disap-
pointment and all antagonisms, he retained the support, if not the con-
fidence of C. P. Morgan until the last hour of the independent existence
of Atlantic Acceptance Corporation. No examination of the reasons
why the costs of Daylite of Grand Bahama projects exceeded estimates
by such substantial and indeed startling sums would be complete with-
out some attention being paid to what is known, or has come to light,
about his personal transactions. It has already been seen that Morgan's
representatives on the spot found him difficult to work with and resentful
of even the most justifiable inquiries. Both Pollock and Saunders had
reason to repent of having crossed him in their efforts to keep Morgan
informed and protect the interests of Atlantic Acceptance. One pay-
ment which caught the eye of the investigators, made by Daylite of
639
Lucayan Beach and Dalite
Grand Bahama with funds advanced to Dalite Corporation by Com-
modore Sales Acceptance, involved the rebuilding of a yacht, which none
of these companies owned but belonged to Mrs. E. Last according to
its certificate of registration.1 Its name was "Aquila III" and the certifi-
cate shows that it was built in 1959 in Tilbury, Ontario, and rebuilt in
Toronto in 1962 by Master Welders Limited of Port Credit. After
giving details of its length and twin diesel engines, tonnage of 20.77
tons and ownership of all 64 shares by Elsie Last, 44 Cumberland
Drive, Port Credit, Ontario, it states that Eugene Last of the same
address had been appointed "manager". On an original letter from J. W.
Humphries, assistant registrar of shipping for the Department of National
Revenue (Customs & Excise), dated February 24, 1964, inquiring as to
whether Mrs. E. Last was still owner of the vessel, there appears in
handwriting at the foot of the page "Dear Sir: Yess. Mrs. E. Last is
still owner of AQUILA III address is same."2 An invoice was found
among the records of Daylite of Grand Bahama from Rybovich & Sons
Boat Works Inc., West Palm Beach, Florida, dated April 25, 1964,
addressed to that company, billing the amount of $8,022.57 for "hard-
ware for docks."3 On this is a note in the handwriting of Frank Cock-
burn, saying "original approved by Julian O'Reilly", O'Reilly at that
time being vice-president of Daylite of Grand Bahama. Added to that
are the words "job 202", referring to the marina. This invoice was
paid for by Daylite of Grand Bahama cheque No. FP- 14207, dated
April 21, 1964, signed by Nathan Saunders and Julian O'Reilly.4 It
will be noted that this cheque was written four days before the date
of the invoice and this must be regarded as unusual. A further copy of
this invoice, with work orders attached, was obtained from Rybovich &
Sons, and each page of the work orders has the name "Aquila" endorsed
on it.5 The work orders, which consist of some twenty pages, wholly
relate to repairs to a boat, and another invoice was attached to it, dated
July 15, 1964 and numbered 985, also addressed to Daylite of Grand
Bahama, in the amount of $3,000.39. Although there is no evidence of
payment of this, the hourly rates for work set out in it coincide with
the "Aquila" invoice in respect of "hardware for docks." One of Miss
McCarthy's daily reports from Daylite of Grand Bahama, dated April
22, 1964, gives a list of cheques drawn on the company's U.S. dollar
account.6 No. 14207, dated April 21, was made payable to Rybovich
& Sons in the amount of $8,022.57 and is described in the report as
being for "marina stores equipment." This invoice was sent up to
Dalite Corporation in the ordinary course, so that the money could
'Exhibit 3129.
2Exhibit 3130.
3Exhibit 3131.
'Exhibit 3132.
'Exhibit 3133.
'Exhibit 3134.
640
Chapter IX
be included in the payments made by Commodore Sales Acceptance,
in a report dated April 27, 1964,7 showing invoice No. 642 in the same
amount as shown on the cheque report of April 21.
This was not the first time that payments of this kind had been
made for work done on Aquila III. There are documents relating to
the year 1962, showing that the yacht had been enlarged by adding six
feet to its hull, and two diesel engines installed for which payment was
made by Dalite Corporation. This was the rebuilding done by Master
Welding Limited which supplied the Commission with a copy of an
invoice number 5510, dated February 28, 1962, sent to Dalite Corpora-
tion8 in the amount of $1,831. This relates to a shop order from the
same company dated January 24, 1962, headed "Dalite Corp.", addressed
to 300 Dwight Avenue, New Toronto, and authorized by "Gene Last."9
The shop order begins, "rework — cabin cruiser at No. 17 Pier in
Toronto", and goes on to give details of the work to be done, but there
are two handwritten memoranda related to it,10 the first on paper headed
"Master Welding Limited", reading:
"Dalite Corp — work on Cabin Cruiser
Material 251.36
Labor 1,579.75"
giving a total of $1,831.11. The second, on plain paper, reads "Invoice
as — supply materials, fabricate and assemble steel jigs for pre-fab houses
as per Dwgs. and instructions by Dalite Corp. They will issue licence to
cover taxes. In 5510. Authorized by Gene Last". The particulars of
invoice 5510, referred to above, are "supply material, fabricate and
assemble steel jigs as per dwgs. & insts." The amount billed is $1,831
exactly, not including the 11^. In the purchase journal of Dalite Cor-
poration for February 1962 there was recorded on February 28 an
amount payable to Master Welding Company of $1,831, charged to
"prefabricating expenses, domestic."11 The accountants for the company
in the year in which this transaction took place were Walton, Wagman
& Co., and in their audit file12 is a schedule entitled "Dalite Corporation
(Canada) Limited — Schedule of Moving Costs and Re-Equipment July
31, 1962". This refers to an account from Master Welding Limited for
"steel jigs" in the amount of $1,831.13
The certificate of registration for Aquila III contains the infor-
mation that in 1962 two turbo-charged diesel engines, manufactured
by Caterpillar Tractor Company of Peoria, Illinois, were installed in
7Exhib
8Exhib
"Exhib
10Exhib
1JExhib
,2Exhib
13Exhib
t 3135.
t 3136.
t 3137.
t 3138.
t 3139.
t 1716.
t 1716.1.
641
Lucayan Beach and Dalite
the vessel. These were supplied by George W. Crothers Limited of
Toronto, and this company furnished the Commission with a photo-
static copy of an invoice addressed to Dalite Corporation,14 dated April
3, 1962, charging it for "one complete power package as per your
P.O. 1914", af a cost of $7,980 and adding $239.40 for Ontario retail
sales tax. On the face of this invoice are the words "Ship to Aquila III
Pier 17 Marine Terminal Toronto." Payment for this is recorded in the
Dalite Corporation purchase journal as number 37 for April 19, 1962
in the amount of $7,980 by George W. Crothers Limited and charged
to "prefabricating expense domestic— D.N.A."15 No sales tax payable
to either Canada or Ontario is recorded as having been paid, because
this expense was made attributable to a Department of Northern Affairs
contract, and on the original invoice of the Crothers firm is the legend
"S.T.N.I. see corrected copy", which may reasonably be translated as
"sales tax not included." The Department of Northern Affairs contract
was by fixed price, so that Dalite Corporation evidently assumed the
additional expense of these engines, and there is no suggestion that the
Department unwittingly paid for them.
The earlier history of this vessel, during a period admittedly prior
to the date when Commodore Sales Acceptance was supplying Atlantic
money for its embellishment, is illustrated by an original builder's
certificate under the Canada Shipping Act, made by Raymond Goodreau
and dated January 1959, without specifying the day of the month.16 The
owner is described as "Elsie Last, 44 Cumberland Drive, Port Credit,
Ontario (married woman)." The audit papers of Glick & Levine17 con-
tain a photostatic copy of an invoice from Raymond Goodreau Steel
Boats and Fishermen Supplies, dated December 18, 1958 and directed to
Dalite Furniture & Store Fixtures Company Limited, for an amount of
$ 1 ,900, the detail being given as "to reline steel and stainless steel tanks
— for plating."18 The invoice is stamped "paid prices O.K.", initialled
"E.L." in Last's familiar handwriting and annotated "Mach Rep" in the
same hand. An account with Raymond Goodreau appears in the Dalite
Corporation accounts payable ledger containing two entries, one from
the purchase journal and one in the disbursement journal, indicating pay-
ment of $1,900 on December 18, 1958. The purchase journal discloses
that this payment was set up and charged to "Machinery Repairs
Expense." The audit papers of Glick & Levine again provide a photo-
static copy of an invoice from Boyce Boiler Company to "Dalite
Furniture Company Limited", dated October 30, 1958, in the amount
of $253. 38. 19 On the invoice the charge is said to be for "Crane loading
"Exhibit 3141.
"Exhibit 3142.
"Exhibit 3143.
"Exhibit 2922.
"Exhibit 2922.1.
"Exhibit 2922.2.
642
Chapter IX
tank on float, delivery and unloading." The word "tank" on the invoice
has been typed at a different angle from the other words in the line.
This invoice is similarly stamped as to approval of quantities and prices,
initialled "E.L" and marked "Mach Rep." A Commission investigator
attended at the premises of Boyce Boiler & Machinery Company in
Toronto, and obtained the company's copy of the invoice, with a work
order and purchase order attached,20 dated October 30, 1958, for the
same amount of money; on this the description reads, "Crane loading
boat on float, delivery and unloading." The company work order refers
to the pick-up point as being Pier 14 "Jarvis slip", and to loading a
boat, and is endorsed "for delivery, — V. Last". The purchase order
dated October 24, 1958 is from Dalite Corporation to Boyce Heavy
Machinery Movers, is signed "E. Last" and gives instructions to move
"Manana III" from Pier 15 to 300 Dwight Avenue. Documents from
the Registry of Shipping relating to Manana III21 show that it was
owned by Arnold C. Burke and was acquired by E. Last in October
1958. This was a 40-foot yacht the hull of which had been damaged
in launching operations at the Royal Canadian Yacht Club, and it
would appear from subsequent inquiries by the Commission's investi-
gators that it was bought by Last and "cannibalized" in the Dalite plant,
the fittings being transferred to the new hull built by Raymond Good-
reau for Aquila III. The files of Glick & Levine for the year ended
July 31, 1960 again provide a schedule entitled "Dalite Furniture &
Store Fixtures Company Limited — sundry memos for year ended July
31, I960".22 This notes four payments; two to Burke for $8,000 and
$4,252.32, one in October 1958 to "Boyce Boiler" of $253.38 and one
to Raymond Goodreau in December 1958 for $1,900. Opposite these
notes appear the abbreviations "PI. and Equip." The amount shown as
paid to Goodreau agrees with what was paid for the construction by
him of the hull, and the Boyce Boiler item agrees with the amount
billed to move Manana III from Toronto Harbour to 300 Dwight
Avenue. The general journal of Dalite for July I96023 shows that on
July 31 the plant and equipment account was charged with $12,252.32
for machinery repairs and the expense account was relieved of the same
amount. The reference here to plant and equipment repairs indicates
that they were made by Burke Electric & X-Ray Company Limited and
the audit working papers state that they were "oven repairs." The pay-
ments to Rybovich, Crothers, Master Welding, Goodreau, Boyce and
Burke amount to $31,514, and subsequent investigation shows that there
is little doubt that a good deal more was spent at the expense of Dalite
Corporation in that company's premises on work done to Aquila III.
"Exhibit 3147.
"Exhibit 3148.
"Exhibit 2923.10.
"Exhibit 3 1 50.
643
Lucayan Beach and Dalite
Eugene Last would not be the first manufacturer to maintain a
boat of this type in his company's name and at its expense, but there
is no evidence that Aquila III was ever considered to be the property of
either Dalite Corporation or Daylite of Grand Bahama. In fact there
is evidence indicating that Last treated payments made for insurance
and repairs as personal expense items at other times. He was, as might be
expected, closely examined by Mr. Shepherd about Aquila III, when all
the documents were put to him. His explanation of the Rybovich in-
voices was that Allen Manus sent his own captain to Toronto to take
Last's boat to the Bahamas, and when it arrived gave instructions to
Rybovich to make the alterations which he, Last, had in no way com-
missioned, and indeed expressly repudiated.24
"Q. Then do I understand you to say that Mr. Manus, without any
authority or discussion with you of any kind, put this yacht into Rybo-
vich and gave them instructions to do extensive changes and repairs to
it?
A. That is correct.
Q. That was an extremely unusual thing for him to do, wasn't it?
A. Not only that, but he represented to Mr. Rybovich that he owned
the boat.
Q. Now, why did he do that?
A. I don't know. Really, I don't know, but I understood —
Q. You must have asked him, though. It would be the obvious ques-
tion when you found your yacht in there with a great deal of work
being done to it, somebody else having told them to do it.
A. If you had been there you would have heard me screaming to Rybo-
vich and him when I got back. Mr. Saunders was present with me at
the time when it happened.
Q. What did Mr. Manus say as to what moved him to do anything
so unusual?
A. Do you know him? Do you know Mr. Manus personally?
Q. No.
THE COMMISSIONER: Just answer the questions, please, Mr. Last.
THE WITNESS: He had his boat built by Rybovich, and he is the
type of a guy that wants to show off, a big operator.
MR. SHEPHERD: Do you say, then, that he, without your knowl-
edge, took your boat to Rybovich, told Rybovich that he owned the
boat, and told him to carry out extensive renovations on it, all of this
being done without your knowledge?
A. Exactly.
'Evidence Volume 65. pp. 8870-3.
644
Chapter IX
Q. Then the job, when ultimately completed, resulted in a bill, and
that bill was sent to you; is that correct?
A. Right.
Q. The first bill?
A. Yes.
Q. It was sent to you?
A. Yes.
Q. And so far as Rybovich was concerned, you owed Rybovich, and
so far as you were concerned, Manus owed you?
A. Yes.
Q. Is that the position?
A. Right.
Q. So that what you did under those circumstances was to obtain an
invoice stating that this was "Hardware for docks" and have that in-
voice paid with money derived from Commodore Sales Acceptance,
through Dalite (Canada)?
A. Yes.
Q. Now, is that the next step?
A. Yes, that is right.
Q. Then you hoped and believed that when the Lucayan Beach Hotel
had completed its contract with Day lite (Grand Bahama) through the
subsidiary, Lucayan Village, you would have been able to charge this
in as an extra?
A. Yes.
Q. And the money would be recovered in that manner?
A. Right.
Q. Is that the explanation?
A. Right.
Q. That is to say, Lucayan Beach Hotel would pay for it instead of
Mr. Manus?
A. That is what he instructed me to do.
Q. And what you agreed to do?
A. Right.
Q. But immediately the position was that you got an invoice which
you owed, you went back to Rybovich, got him to change the invoice
and charge it to Daylite (Grand Bahama). Is that correct?
A. Right."
When Rybovich was interviewed in West Palm Beach by Mr. Cartwright
he remembered the incident perfectly, and said that Last at no time
645
Lucayan Beach and Dalite
expressed any concern about Manus having been given instructions to
repair his boat. Subsequently, and as further explanation of the role
played by Manus in this transaction, Last offered an invoice from the
Kelly Tractor Company addressed to "Alan Manus M/V Aquila West
Palm Beach Florida for repairing the raw water pump and installing
new hoses." The amount of the bill was $223.79 and it was paid
by Last on May 20, 1964.25 The point which Last wished to make, in
connection with this invoice, was that it corroborated his assertion that
Manus represented himself as owner of Aquila III and had incurred
expenses without authority. The vessel was at the time under the
control of Manus's professional captain when the real owner was evi-
dently in Toronto; so that there is nothing remarkable about the bill
being sent to the man whose employee had ordered the work to be
done. James E. Maher has stated that he accompanied Last and Manus
to the Rybovich works to inspect it, and that at that time it was planned
to use it in the service of the Lucayan Beach Hotel Company. If this
were the real intention it was not testified to by Last, and does not
explain or justify the work being charged to the marina project.
As to the previous history of Aquila III and the purchases made
from Crothers, Boyce, Master Welding, Goodreau and Burke, Last's
explanation was that Dalite Corporation at all times owed him con-
siderable sums, that these charges should have been made against his
personal account and that the person responsible for charging them
to the company in error was W. R. Miller. Miller's resignation as
general manager of Dalite in 1962 has already been noticed. Last
suggested that Miller was earlier an employee of Commodore Sales
Acceptance who had been installed in the Dalite organization by that
company. Miller was indeed hired as general manager of Dalite Cor-
poration, at the instance of C. P. Morgan in April, 1962, and resigned
in September. Since he resigned on a question of principle, involving
at least the proper ownership of Dalite Corporation (Manitoba) Limited,
it is inconceivable that he would be a party to charging to the com-
pany personal expenses of Last laid out on a boat owned by Mrs. Last,
or would have done so in error, and this statement must be considered
reckless and untrue. Last's evidence as to the altered Boyce Boiler &
Machinery Company invoice for moving Aquila III to the company's
plant was as follows, and is typical of his attitude to questioning on the
whole subject.26
"Q. I show you an exhibit, Exhibit 2922.2. This is a photocopy of an
invoice found in the files of the accountants Glick & Levine. It is from
Boyce Boiler & Machinery Company Limited to Dalite Furniture Com-
pany Limited, dated the 30th October, 1958, reading: 'Crane loading
tank on float, delivery & unloading,' followed by some particulars,
"Exhibit 3210.
"Evidence Volume 65, pp. 8875-80.
646
Chapter IX
'$253.38,' below which is written, 'Mach' and a different word, 'Rep,'
and then what I take to be your initials. Those are your initials, are
they not?
A. They are.
Q. Now, this invoice was charged to 'Machinery repairs.'
A. One moment. (Cheque produced by witness).
Q. Let me re-assure you on one point, Mr. Last. There were other
payments to Boyce Boiler & Machinery Company Limited by you. It
is this payment here that I am concerned about.
A. Yes.
Q. How did that come to get charged to 'Machinery repairs'?
A. It's way back in 1958.
Q. The original document from the hands of Boyce, Exhibit 3147, is
an exact copy of that invoice, except that it reads, 'Crane loading boat
on float.' Do you see that?
A. Yes.
Q. And the instructions which are attached and which are signed by
you say: 'This order is your instructions to move Manana in from
Pier 15 to 300 Dwight Avenue.' Is that correct?
A. Right.
Q. Do you recall the circumstances? You told Boyce to take two
cranes and pick up the 'Manana IIP and deliver it to 300 Dwight Ave-
nue. You recall that, do you not?
A. I think I did, but I couldn't recall that far back, 1958.
Q. Can you offer any explanation as to how Dalite came to pay the
invoice of Boyce Boiler & Machinery, when the word 'boat' has been
erased and the word 'tank' has been substituted for it?
A. I couldn't tell you.
Q. Did you do that?
A. No.
Q. Was it done on your instructions?
A. Not to my knowledge.
Q. Why did you direct, as appears on the face of the invoice, that that
invoice be charged to 'machinery and repairs'?
A. I didn't. I don't recall.
Q. Have you had an opportunity to offer whatever explanation you
wish to offer respecting that?
A. No."
It is to be hoped that Eugene Last will be given another opportunity
of giving an explanation of these transactions in the courts, because
647
Lucayan Beach and Dalite
they indicate to me that he was dishonest, and provide an explanation
of why attempts to control Dalite expenditures both in Canada and the
Bahamas were frustrated by his calculated hostility. At the time of
the Atlantic collapse Aquila III was moored at the marina in Bell Chan-
nel Bay and Mr. J. L. Biddell, liquidator of Daylite of Grand Bahama
and receiver of Dalite Corporation, took possession of it, asserting owner-
ship on behalf of Daylite of Grand Bahama. Before he could sell it
two unidentified persons, displaying a certificate of ownership in the
name of Mrs. E. Last, removed it and sailed it to Florida, where it was
apparently sold, Mrs. Last receiving some $6,000 of the proceeds.
The Internationa] Aviation Club
The one Grand Bahama project undertaken by Daylite of Grand
Bahama, shown on Table 49 and not previously described, was the
projected construction of an "International Aviation Club". An agree-
ment, dated October 6, 1964, between the Grand Bahama Development
Company and Daylite of Grand Bahama1 provided for the purchase
of a tract of land immediately west of the Lucayan Beach Hotel, lying
between it and what is now the Holiday Inn, and containing 7.2 acres,
for $528,560 in U.S. funds, or a price of approximately $73,400 an
acre. The contract required delivery of a cheque in the sum of $232,140
on October 6, 1964 as a deposit, with the balance due on April 6, 1965
at which time Daylite of Grand Bahama was to receive title to the
property. Provision was also made for the deposit cheque to be post-
dated to January 6, 1965, and this was actually paid by a cheque dated
January 13, 1965 in the amount of $249,477.96 in Canadian funds,
made payable to the Canadian Imperial Bank of Commerce by Dalite
Corporation.2 The total deposit made to the Daylite of Grand Bahama
account with the Royal Bank in Freeport on January 20 was $252,000
in Canadian funds, and this money, from which the deposit cheque was
derived, came, like all the rest, from Commodore Sales Acceptance.
Daylite of Grand Bahama was authorized by a "license agreement" be-
tween it and the Grand Bahama Port Authority, also dated October 6,
1964, to carry on the business of soliciting members for and operating
an "aviation club."3 Proof that C. P. Morgan was aware of the pro-
posal to erect the club is provided by an original letter, dated August 26,
1964, from him to Jules R. Timmins, Jr.4 dealing with a plan to raise
$14,000,000 in U.S. funds and mortgaging various properties described
as "Lucayan Beach Enterprises." It should be said here that Jules R.
Timmins, Jr. was a young man bearing a well-known name in financial
circles, but not associated with his father or having access to the sources
Exhibit 3151.
•Exhibit 3152.
'Exhibit 3154.
'Exhibit 3155.
648
Chapter IX
of his father's many industrial interests. Without putting too fine a point
on it, it was well known in the business community that young Mr.
Timmins's principal, and perhaps only asset was his name. It is un-
likely that Morgan did not know this, but he seems to have been content
to make as much use of that name as he could, and certainly more than
the circumstances warranted. The letter is as follows and is typed on
the notepaper of the executive office at 100 Adelaide Street West:5
"August 26th, 1964
Jules R. Timmins, Jr.,
1 1940 L'Acadie Blvd.,
Montreal 12, P.Q.
Dear Mr. Timmins :
Re: Lucayan Beach Hotel Company
Limited, Grand Bahama Island
$14 million (U.S.)
As a result of conversations held in Toronto on the 20th August,
1964, Mr. James E. Thomson representing you and further as a result
of previous conversations between Mr. Eugene Last and Mr. Thomson,
who at these various meetings were advised by your solicitor, Ross
Tolmie, Esq., Q.C., and John H. McDonald, Esq., Q.C., representing
DALITE, I wish to advise you that I and my Associate, Mr. Eugene
Last are prepared to discuss obtaining through you a mortgage in the
amount of $14 million (U.S.) (more or less) which will be secured by
various Lucayan Beach enterprises as set forth hereunder and con-
ditional upon this mortgage being arranged we will embark upon a joint
venture subject to the conditions set forth hereunder: —
1. It is understood that the original conversations between you and
Mr. Eugene Last had contemplated using a Company to be incor-
porated to handle this proposed business undertaking; however, it
is my suggestion that The Lucayan Beach Hotel Company Limited
be used as the vehicle for this purpose.
2. I hereby warrant that I have effective beneficial control of The
Lucayan Beach Hotel Company Limited to the extent of at least
51% of the voting stock thereof until September 15th, 1964.
3. As soon as the contemplated mortgage hereinabove referred to has
been arranged by or through your group on or before September
15 th, 1964, I hereby covenant to contribute and deliver free and
clear 5 1 % of the total capital stock of The Lucayan Beach Hotel
Company Limited presently outstanding and I further covenant
that this will represent all stock holdings which I, or my nominees,
will hold as of the date of the arranging of the mortgage, to a
Bahamian Holding Company to be incorporated and owned
jointly and equally by the Groups referred to herein (i.e. the Tim-
mins Group and the Morgan Group).
'Exhibit 3155.
649
Lucayan Beach and Dalite
4. Furthermore I will provide an evaluation as of June 30th, 1964
on the properties referred to in this letter both as to current capital
values and also income values of the total complex exclusive of
the Aviation Club.
5. It is further understood that I will covenant that if the aforesaid
mortgage in the amount of $14 million (U.S.) (more or less) at
a rate not in excess of 7% is made available by or through you
(and that if the transaction is arranged to close within 90 days
or thereabouts of 15th September, 1964), I will provide or
arrange the short term financing necessary to ensure that effective
control of The Lucayan Beach Hotel Company Limited be trans-
ferred forthwith to the proposed Bahamian Holding Company.
6. I furthermore covenant that the following subsidiaries of The
Lucayan Beach Hotel Company Limited and the adjacent prop-
erties required for the proposed Aviation Club and Yacht Club
will be included in the overall complex which consists of the
following: —
(i) The Lucayan Beach Hotel
(ii) The Lucayan Village Company Limited
(iii) The Lucaya Marina Company Ltd.
(iv) 110 Efficiency Units of rented apartments
(v) 40 one and two bedroom units
(vi) All the facilities in connection therewith
7. In connection with the foregoing, I am prepared to give you a
detailed summary of the disposition of the total sum of such
mortgage as may be arranged by or through you.
8. It is further understood that you on your part will covenant to
provide for the membership of the Aviation Club pursuant to a
letter signed by you addressed to Mr. Eugene Last dated August
17th, 1964.
9. It is further understood that should the mortgage be arranged all
reasonable expenses in connection with the foregoing shall be
borne by The Lucayan Beach Hotel Company Limited and that
if the principals advancing the mortgage funds require reasonable
participation that such participation and/or fees or other costs
shall also be borne by The Lucayan Beach Hotel Company Limited.
10. Pursuant to previous discussions between yourself and Mr. Eugene
Last, I concur in your wish to have Price Waterhouse & Co., Char-
tered Accountants, appointed as Auditors, providing, however, that
I may have the right to appoint the Comptroller of The Lucayan
Beach Hotel Company Limited.
11. I shall be pleased to supply such documentation as you may require
and have tentatively arranged to leave for London with Mr. James
Thomson and yourself on or about the 28th August, 1964 for the
purpose of finalizing this matter during the following week before
your principals leave England on the 4th September as indicated
by Mr. Thomson.
650
Chapter IX
12. This commitment expires September 15th, 1964 unless renewed
by me in writing.
Yours faithfully,
'C. Powell Morgan' "
Two things will be noted here; the first is Morgan's knowledge of the
aviation club plan as early as August 1 964, and the second his warranty
of effective beneficial control of the Lucayan Beach Hotel Company,
whereas all the evidence available to the Commission indicates that in
September 1964 he and his associates controlled only 35% of the com-
mon stock. A company was incorporated under the name of Aviation
Country Club Limited6 and the directors after incorporation were Jules
R. Timmins, Jr., James E. Thomson and Eugene Last.7 The letter
mentioned by Morgan as being from Timmins to Last was dated August
178 and referred to an undertaking of Timmins to furnish a feasibility
study for the club which was actually prepared by Weir, Duncan & Co.,
chartered accountants in Montreal. A copy was furnished to the Com-
mission by Timmins,9 and the study forecast that twelve months after the
venture began it would generate cash in the amount of $630,000, either
from operations or from loans on capitalization. On the other side of the
picture there was found a document in the files of Duncan Hopper &
Associates, estimating the costs of a project entitled "Aircraft Owners
and Pilots Club", also referred to as Inter Avia Limited.10 The latter
name was not ultimately used, so this document would appear to have
been prepared prior to the end of August; in it the total cost of construc-
tion was estimated at $5,050,000. Found with it was an unbound bro-
chure containing plans and sketches of the proposed Aviation Club, or
"Club 370 — A Point Beyond the Compass Circle", and the pretentious
building there illustrated was to face the sea in a half ellipse, with a large
swimming pool and other refinements.11
The proposal to build an additional structure at such a cost, with
no other financing in view except the over-strained and deeply compro-
mised resources of Atlantic Acceptance, makes one wonder if C. P.
Morgan was not, even as early as the summer of 1964, losing his grip
on reality. Even more astonishing is that the plan to raise $14,000,000
by way of mortgage negotiated in London was actually attempted. Tim-
mins and Thomson went to London for five days in August and amassed
a bill of £.361.7.10 at the Dorchester Hotel. According to Thomson,
who was examined with Timmins under the Securities Act,12 they were
met there by Morgan, but no record of his expenses has been found. The
•Exhibit 3156.
TExhibit 3157.
"Exhibit 3158.
"Exhibit 3159.
"Exhibit 3160.
"Exhibit 3161.
"Exhibits 3708-9 and 3711.
651
Lucayan Reach and Dalite
rate for rooms at the Dorchester Hotel 13 was 1 8 guineas a day and the
whole amount was eventually paid by Dalite Corporation in March 1965,
after the manager of the hotel had written unavailingly to Timmins in
Montreal ,14 Timmins testified about his impressive business connections
in England and on the Continent, dropping among others the name of
Prince Andrew of Yugoslavia. The fecklessness of this junket, even to
the hotel bill left unpaid for six months, is characteristic of the promo-
tional activities undertaken on Dalite's behalf by Timmins with the
assistance of Thomson and S. J. Hogg, the last being particularly active
in the promotion of fresh enterprises in Nassau and in the West Indies.
Thomson, on his own showing, had led a hand-to-mouth existence since
the war, and the apparent willingness of C. P. Morgan to consider seri-
ously the most elaborate proposals must have looked good to him in-
deed. Hogg was a practical engineer without professional qualifications,
but shared with Eugene Last the distinction of being a "Doctor of
Humanities" from Philathea, though he did not aspire to commissioned
rank in the Maltese army.
In October 1964 a lavish promotional entertainment was conducted
at the Diplomat Hotel in Hollywood-by-the-Sea, Florida, where the Air-
craft Owners and Pilots Association were convened, to arouse interest
among owners of light aircraft for which the island of Grand Bahama
provided the most accessible oversea destination. On this occasion half-
a-dozen models were recruited from an agency in Coral Gables to act as
"hostesses". The result was more fruitless billing of Timmins and no
record of how payment was made. Timmins testified that the idea of an
aviation club originated in a discussion between himself and James E.
Maher in October 1963 (denied, incidentally, by Maher), that he sub-
sequently attended a convention of the Aircraft Owners and Pilots Asso-
ciation in Houston, Texas, where he met a man called Frisch and settled
on an amount of $47,500 as being necessary to "reach the members of
the organization." Thereafter he had visited Germany in an attempt to
raise money there and dealt with a "contact man" by the name of Rom-
berg. The scheme languished until June of 1964, when he was told by
Thomson that his firm, presumably Dalite Corporation, had $900,000
available to finance the project. A meeting with Thomson occurred in
Montreal at a large house and under circumstances which Thomson
found, as stated in his testimony, most impressive. Thomson then intro-
duced Timmins to Last, and thereafter Timmins and Last, according to
the former, engaged in discussions about their dividing between them on
an equal basis the stock of a company called Timmins Trust Company
Limited, incorporated in the Bahamas, which would in turn hold a con-
trolling interest in Daylite of Grand Bahama. For his interest in Timmins
"Exhibit 3164.
"Exhibit 3165.
652
Chapter IX
Trust, Last was to pay Timmins $50,000. In the upshot Last provided
Timmins with $5,000 of Daylite of Grand Bahama funds and the two
parted company in March, 1965, when Thomson and Hogg went over to
London to exploit further what Timmins regarded as his own connec-
tions in the financial community there.
The comic aspect of all these comings and goings and building of
castles in the air is overshadowed by the fact that Dalite Corporation
billed Daylite of Grand Bahama in the amount of $77,000 for the pro-
motional expense involved. An example of these charges is a document
found in the records of Dalite Corporation, recording payments in the
amount of $10,449.89 made to Eugene Last in December 1964. It is a
regular expense summary with invoices and vouchers attached.15 Most
of the expense items are attributable to the Aviation Club, including
$1,414.71 to Frisch of the Aircraft Owners and Pilots Association for
expenses in Freeport and consulting fees. Hotel charges amounted to
$3,520.85, the largest bill being at the International Airport Hotel in
Miami for $1,748.80. None of Last's travelling expenses appear to be
an item of this invoice, but according to an expense account submitted
in December 1964, covering a period from September 15 to December
17, these amounted to $9,106.01 in Canadian funds, including charges
for almost daily travel between Nassau and Freeport, in spite of the fact
that the Lucayan Beach Hotel was in operation and Daylite of Grand
Bahama had built apartments and other accommodation which were
available for use by its officers. For the calendar year 1964 a conserva-
tive estimate of Last's travelling expenses, paid by Dalite Corporation
with Atlantic money, is $38,000.
Throughout the period from the early autumn of 1964 to the spring
of 1965 Dalite Corporation was also engaged in an intensive lobby, con-
ducted by Thomson, to change the provisions of the Export Credits Insur-
ance Act, with a view to securing Canadian government guarantees of
long-term financing of prefabricated housing contracts abroad, an enter-
prise which relied largely on the services of Ross W. Tolmie, Q.C. and
John H. McDonald, Q.C. of Ottawa, both of whom are mentioned in
Morgan's letter to Timmins. It also included the issuing of invitations
through them to the Prime Minister, the Minister of Trade and Com-
merce, and the Minister of Transport to attend the ceremonial opening
of the Aviation Club, which did not exist, and the motel-marina complex
in early January of 1965. Mr. Pearson and Mr. Sharp gracefully de-
clined, but Mr. Pickersgill, accompanied by Mr. Tolmie, apparently did
attend and stay at the Lucayan Beach Hotel. At this time Mr. Pickers-
gill, as Minister of Transport, was being asked by Dalite's representa-
tives to support the provision of scheduled flights to and from Freeport
by Air Canada, a Crown corporation, so that his appearance, according
'"Exhibit 3166.
653
Lucayan Beach and Dalite
to Thomson's correspondence with McDonald which Thomson furnished
to the Commission, was regarded as particularly advantageous.
As it turned out, not surprisingly in view of the projected costs, the
Aviation Club was never built. The project, to which the number 221
was assigned, was being closely watched in Toronto, as indicated by a
memorandum of October 26, 1964 from Woolfrey to Cockburn saying:
"It is important that C. P. Morgan is informed when any expenditures
are made on No. 221. He has not authorized any to date." Months later,
on April 6, 1965, Commodore Sales Acceptance advanced the balance
of the purchase price of the land in the amount of $296,420 in U.S.
funds by way of a loan to Dalite Corporation, and this money was sent
by draft from the Canadian Imperial Bank of Commerce direct to the
Royal Bank of Canada in Freeport, with instructions to the manager to
hold it for the account of the Grand Bahama Development Company,
"pending receipt of a clear title in favour of Daylite of Grand Bahama."
Daylite of Grand Bahama never received a conveyance, and the amount
of this deposit was eventually returned to Commodore Sales Acceptance
after it went into receivership.
San Jose Construction (Bahamas) Limited
In the meantime there was a characteristic intervention by Eugene
Last who caused to be incorporated by Peter D. Graham a company
called San Jose Construction (Bahamas) Limited in September 1964.
The first shareholders and directors were Eugene Last, Julian O'Reilly
and Bernard Thompson, and were elected president, vice-president and
secretary respectively. When asked to explain the reason for the existence
of this company, Last testified that it was necessary on two grounds: first,
because Daylite of Grand Bahama held a licence merely to operate an
Aviation Club and not to construct it, and second, one Raymond Tower,
an employee of the Development Company, had suggested the incorpor-
ation of a new vehicle because of the proliferation of Daylite of Grand
Bahama projects. Neither reason is convincing, and it seems that the
principal justification for the existence of San Jose Construction in the
eyes of Last was the opportunity for himself to make money for which
he would not be accountable to C. P. Morgan, who, in spite of Last's
statement on oath to the contrary, evidently knew nothing about its oper-
ations until they were far advanced.
San Jose Construction entered into an agreement with Daylite of
Grand Bahama to excavate the site for the Aviation Club on November
3, 1964.1 It provided for preparation of the site without cost to Daylite
of Grand Bahama, the delivery of top soil and sand by San Jose to com-
plete the landscaping of other Daylite of Grand Bahama projects as re-
quired, and the moving of 5,000 cubic yards of sand to the Lucayan
1Exhibit 3209.
654
Chapter IX
Country Club, owned by the Development Company, for which it was
said that it would receive some 30,000 yards of fill material from the
Development Company to be placed on the Aviation Club site. In con-
sideration for all this, Daylite of Grand Bahama bound itself to allow
San Jose to remove all surplus sand and other material becoming avail-
able as a result of the excavation. This agreement was signed by Eugene
Last for Daylite of Grand Bahama, and for San Jose by a man called Al
Zinno, a contractor from Miami, who was, as Last said, "supposed" to be
a director of San Jose, and who had been appointed by Last a vice-presi-
dent "over the telephone." No doubt the prospect of signing this agree-
ment for both parties occurred to Last as being faintly improper; O'Reilly
himself was an officer of both companies; so Zinno was called upon to
do the honours for San Jose in an obvious effort to give an "arm's length"
appearance to the transaction. The agreement itself was produced by
Last when he testified before the Commission and was not found by the
liquidator in the records of Daylite of Grand Bahama. A great deal of
sand was removed and sold from land which was still owned by the
Grand Bahama Development Company, and in the teeth of its directive
of November 8, 19632 to all contractors and sub-contractors not to re-
move sand without authority. Tramiel testified to having seen the ugly
hole and bared rock that the removal of sand on this large scale created,
apparently much in excess of what was required for the footings of the
Aviation Club.
Unaudited financial statements of San Jose Construction for the
six-month period ended April 30, 19653 show income from sand sales
of $103,063.60. Earned surplus for the whole period amounted to $52,-
334.62, of which $45,41 1 resulted from the sale of sand after all depre-
ciation and vehicle expense had been charged against sand sales, included
in what was described as the "equipment division". The other division
of operations was the "construction division" which was to build du-
plexes, a racquet club and a sea wall, only the last being constructed.
The statement also shows a paid-in surplus of $31,942.44 which Eugene
Last said was his own money. He undertook to produce cheques in
support of this statement drawn on his account in Nassau. These have
not been forthcoming, but there is no reason to doubt that he supplied
the money, because, as will be seen, he was in a position to dispose of a
much larger sum, which was nevertheless acquired under circumstances
making it almost certain that it was not his. Subsequently, and after
the collapse of Atlantic, Last transferred 50% of his ownership of San
Jose to Julian O'Reilly, who was still operating the company in a small
way in Freeport at the time of writing, but at the time of these trans-
actions it effectively belonged to Last and this fact he admitted in his
evidence. There was no direct or overt contribution of Atlantic funds to
•Exhibit 3186.
•Exhibit 3183.
655
Lucayan Beach and Dalite
San Jose, but since the removal and disposal of the sand in the course
of preparing the site of the Aviation Club had expensive consequences
for Daylite of Grand Bahama, its operations are pertinent both as a
source of loss and as evidence of dishonest dealing on the part of Last.
After the collapse of Atlantic, and specifically on June 29, 1965,
when it was clear that the Aviation Club would never be built by Day-
lite of Grand Bahama, a new agreement was entered into between that
company and the Grand Bahama Development Company, cancelling
that of October 6, 1964 and providing for payment by Daylite of Grand
Bahama to the Development Company of $100,000 in U.S. funds, the
surrender of its licence from the Port Authority to operate the Aviation
Club and the sale by it to the Development Company of 30,000 cubic
yards of sand and fill, located on Bell Channel Bay and removed from
the Aviation Club site, for the sum of £ 1 . This agreement is only intel-
ligible by reference to the affidavit of John Leonard Biddell, to which it
is an exhibit, made in connection with proceedings taken in 1966 in the
Bahamas to have him ousted as liquidator of Daylite of Grand Bahama
at the instance of Duncan Hopper & Associates,4 in which it appears that
the payment of $100,000 made to the Development Company was in
effect liquidated damages for the removal and sale of sand which could
not be recovered. As a further exhibit was the following original agree-
ment in the form of a letter, dated June 28, 1965, from the treasurer of
the Development Company to Eugene Last and subscribed to by him.
"An agreement has been reached to cancel a contract entered into
on 6th October 1964 whereby the Grand Bahama Development Com-
pany, Limited contracted to sell certain properties to Daylite of Grand
Bahama Company, Limited for the purpose of building an Aviation
Country Club.
Under the agreement to cancel this con fact the Grand Bahama
Development Company, Limited will return $132,140.00 of the down
payment received on the contract to Daylite of Grand Bahama Com-
pany, Limited with the stipulation that any debts or obligations owed
to the Grand Bahama Development Company, Limited, any of its
subsidiaries or affiliated companies, will first be satisfied from the above
amount.
For this purpose the Grand Bahama Development Company, Limited
is to establish a specific checking account in its own name with the
Royal Bank of Canada, Freeport branch, in the amount of $132,140.
The Development Company will disburse said funds only upon the
written direction of Daylite of Grand Bahama authorizing the Develop-
ment Company to settle the above specific obligations of Daylite.
It is understood that when all of Daylite's obligations to the Develop-
ment Company, its subsidiaries and affiliated companies, are extin-
guished to the complete satisfaction of the Development Company any
amounts remaining in said fund will then be paid to Daylite of Grand
Bahama Company, Limited."
'Exhibit 3181.
656
Chapter IX
Thus it was agreed that the deposit paid by Daylite of Grand Bahama
to the Development Company, less $100,000, would be refunded. In fact
only $77,235.77 was actually returned, so that a sum slightly in excess
of $50,000 was evidently retained and disbursed, with the agreement of
Last, in respect of debts owing by Daylite of Grand Bahama to the
Development Company and its subsidiary and affiliated companies. In
an affidavit made in the same proceedings5 he pretended, or was made
by the draftsman to appear to pretend, not to understand that any pay-
ments were due to the Development Company and its subsidiaries, but
since the affidavit culminates in the assertion that the real assets of Day-
lite of Grand Bahama amounted to $7,000,000, it can only be regarded
as a measure of what Last was prepared to tell his solicitors and to sub-
scribe to on oath, and it is not surprising that the action taken to displace
Mr. Biddell was unsuccessful. It is of some significance that nowhere in
the affidavit does Last contend that $100,000 was not a fair settlement
for the sand removed and sold, and in his evidence before the Commis-
sion he justified this by saying that the return of only part of the deposit
was a better deal than could otherwise have been obtained from the
Development Company. Only Julian O'Reilly, in an unsigned letter
identified by Mr. Biddell as having been written by him in response to a
letter of his own sent in February 1966, complained about this valua-
tion, and on the ground that the Development Company was claiming
unlawful conversion of 200,000 cubic yards of sand, whereas the un-
audited financial statement of San Jose only showed sales of 33,000, an
ingenuous comment which tends to confirm the Development Company's
contention.6 Accordingly Daylite of Grand Bahama, and ultimately At-
lantic Acceptance, lost $100,000 of money to which it was otherwise
entitled, because its president, Eugene Last, had, in his capacity as pro-
prietor of San Jose Construction, sold for the account of the latter a large
quantity of sand taken from land which neither company owned, accord-
ing to the terms of an agreement which fortuitously came to light only
when he gave evidence before the Commission, and which he himself
admitted was drawn in the Daylite of Grand Bahama office and not in
that of the company's solicitors in Nassau.
C. P. Morgan's recollection of this affair is, as always, expressive
and should be quoted.7
"A. In the first instance the land was actually never conveyed to Daylite
of Grand Bahamas. It was one of those usual Last deals which had a
series of conditions to it, which the Grand Bahamas Development Com-
pany are in favour of. They usually put a clinker in it that works out to
their advantage.
Land was acquired and a deposit was made on it. An arrangement
'Exhibit 3187.
"Exhibit 3184.
'Evidence Volume 26. pp. 3516-9.
657
Lucayan Beach and Dalite
was made with a group from Las Vegas to build the aviation club and
all the necessary financial backing to do the thing was apparently
available.
However, when the Development Company found out that this was
going to be a Las Vegas operation they did not want any part of it. So
that went down the drain. Then when the balance of the purchase price
was demanded by the Development Company on 24 hour notice, that
if it was not paid the original sum would be forfeited, it was put in
escrow by myself in the bank in Freeport conditional upon getting a
complete title to the land, which did not have any requirement of an
aviation club to be built upon it.
This did not suit Mr. Groves at all, so I had to go down to the
Bahamas and I sat in with him in his office and he told me the story
about the San Jose Construction Company which he claimed Mr. Last
had taken the surface sand off this beach property and had destroyed
the contour of the beach, and to make matters worse had sold it all over
the Island at $3.50 a yard and had pocketed the money — to this extent,
that it had gone into the coffers of the San Jose Construction Company
and not into the still owners of the land, which was the Grand Bahamas
Development Company.
Q. Who owned the San Jose Construction Company at this point?
A. This is the first time I knew anything about San Jose Construction
Company, and it is evidently a company that was incorporated and
formed by Mr. Last and his brother and a couple of other working men
down there.
In other words, that company was taken, put together and formed
out of assets that belonged in essence to Commodore Sales Acceptance.
To make matters even still worse, the money which was tied up in
San Jose Construction from the sale of this land, I won't say it has been
dissipated but you cannot put your hands on it. But the payment, for
getting title to the land, is refused to Commodore and the money is
refunded for the land by the Development Company less a hundred
thousand dollars. So in essence Commodore got all of their money back
except a hundred thousand dollars, and they still should have a hundred
thousand dollars coming from San Jose Construction Company because
Mr. Groves told me that if it was not paid Mr. Last was going to go to
jail because he said he was nothing but a common, ordinary thief and
was stealing sand that did not belong to him. Last denied this. He said
he had a deal with the fellow at the golf club, that he was to exchange
sand for coral, and the coral was to be replaced on the site next to the
Hotel.
I asked Mr. Groves, 'Can Commodore get title to this property and
let us sell it privately?' He wouldn't do it. Because I could have sold
the land for $750,000 in 15 minutes because it was the most desirable
piece of frontage in the whole of the Grand Bahamas.
Q. But the reason you could not get the title was that you were unable
within the time limit to build the aviation club?
A. Yes."
658
Chapter IX
Both Last and O'Reilly attributed all this indignation about the sale
of sand on the part of Groves and officers of the Development Com-
pany to the failure of Daylite of Grand Bahama to secure the erection
of the Aviation Club. As Last put it, Groves felt that the image of the
island had been spoiled. There is probably an element of truth in this,
particularly if Last is correct in his assertion that Groves and his sub-
ordinates knew from the start what was going on. But this must remain
doubtful, because everything Last testified to in connection with San
Jose Construction must be treated with suspicion. There is no record of
any sale of sand by San Jose to the Lucayan Country Club and, according
to what the Commission was told by James E. Maher, who had severed
his connection with the Development Company in November 1964, the
golf course was at that time complete and the club would have had no
need for 5,000 cubic yards of sand. The circumstances under which the
agreement between Daylite of Grand Bahama and San Jose Construction
was prepared, executed and subsequently produced, are not reassuring.
Nevertheless, it is probably fair to assume that unauthorized disposal of
sand, which could not in any event be used for "back-filling" a substan-
tial structure, would have been overlooked if the Aviation Club project
had been brought to a successful conclusion.
The space devoted to this episode in the career of Eugene Last
might be considered inordinately long if it were not symptomatic of
much of what undoubtedly transpired during Atlantic's disastrous ven-
ture into the development of Lucayan Beach, and about which no docu-
mentary evidence exists or can be obtained. There are other straws which
indicate the direction of the wind. During 1964 large sums were paid by
cheque to Latham Construction Company Limited, the Bahamian sub-
sidiary of Latham Construction Company of Palm Beach, Florida, which
was engaged as a sub-contractor in the construction of the marina and
docking facilities in Bell Channel Bay. As a result of conversations be-
tween Edgar H. Latham Jr. of that firm and Mr. Cartwright of the Com-
mission, confirmed by a lengthy correspondence between the Commission
and Latham's attorneys, and subsequently with Mr. Biddell, it appears
that three cheques drawn on the Daylite of Grand Bahama account with
the Royal Bank of Canada, made payable to Latham Marine Construc-
tion Company Limited and signed by E. Last and Julian O'Reilly, were
not received by the payee. The particulars of these cheques are as
follows:8
Number Date Amount
GB 36814 September 5,1964 £8,928.11.5
FP 00731 September 24, 1964 $35,000.00 U.S.
GB 36860 October 17, 1964 £5,357.2.9
•Exhibits 5084-6.
659
Lucayan Beach and Dalite
The cheques are respectively endorsed, in a shaky and unidentifiable
hand, "for deposit only, Latham Marine Construction" on the first two,
and "for deposit only" on the third. They were negotiated at the Nassau
branch of the Chase Manhattan Bank and were cleared back to the
Royal Bank of Canada branch in Freeport. In a letter dated February
23, 1968 Mr. Biddell advised the Commission of discussions which he
had had with officers of the Chase Manhattan Bank, and of being shown
microfilm records indicating that the proceeds of these cheques had in
fact been paid into the account of San Jose Construction Limited, and
had been paid out of the San Jose account for the benefit of Eugene
Last. It will be appreciated that Mr. Cartwright's investigations and those
of Mr. Biddell, to whom the original cheques were given by the Com-
mission, were undertaken on information received after Last had given
his evidence and after his departure for Australia in December 1966.
The apparent theft of upwards of $80,000 in Canadian funds suggests
an explanation of how Last was able to advance some $32,000 to San
Jose, and it is to be hoped that this further example of peculation by
Last will invite the cooperation of the Ontario and Bahamian law en-
forcement authorities in the near future. The complicity of Julian
O'Reilly, now a resident of the Bahama Islands, should not be over-
looked.
Daylite of Grand Bahama's Accounts at the Bank of Nova Scotia,
Toronto Branch
It has already been seen that a Daylite of Grand Bahama bank
account at the main branch of the Bank of Nova Scotia in Toronto had
been used to transfer moneys to Frank Kaftel in Europe. There were in
fact two accounts, No. 5160 for Canadian and No. 4453 for United
States funds. At the time when Mr. Burn and Mr. Wolfman testified no
cancelled cheques for either account had been found, but subsequently
fourteen cheques, drawn upon No. 5160 for an aggregate amount of
$372,400, were discovered by the Commission's investigators in C. P.
Morgan's house and were surrendered voluntarily by his widow.1 These
have already been referred to and their endorsements commented upon
in Chapter VIII. They were all made payable to "F. Kulunderino" and
all evidently endorsed by the same hand. It has been seen previously that
these were payments made to Kaftel as a fee for promoting the sale of
shares of Commodore Business Machines and Analogue Controls in
Europe, at the time when C. P. Morgan was manipulating the market
for their securities. Photostatic copies of ledger cards for both accounts,2
with deposit slips,3 were produced. Also in evidence are nine letters sent
Exhibits 3841.1-3841.14.
'Exhibit 2860.
'Exhibit 3169.
660
Chapter IX
to Barrett, Goodfellow & Co. and signed by C. P. Morgan, instructing
the firm to issue cheques to Daylite of Grand Bahama on his brokerage
account,4 all in practically identical terms except for the specification of
the amounts to be transferred. Generally speaking, withdrawals from
the Daylite of Grand Bahama account made by certified cheque took
place on the same day as the deposit was made and in the same amount,
and out of a total of $598,290 withdrawals by certified cheque made
before the Atlantic collapse, those made on the same day as the deposit
and in the same amount total $428,290. Correspondence of this kind in
date and amount occurred on fifteen separate occasions, but there were
three exceptions. On June 26, 1964 there was a deposit of $50,000
against which $45,000 was withdrawn by certified cheque made payable
to F. Kulunderino, this being the first withdrawal by certified cheque
revealed by the certified cheque vouchers. On August 17, 1964 $100,000
was withdrawn against a deposit of $80,000, and on January 15, 1965
there was a withdrawal by cheque of $25,000 against the deposit of only
$12,500, which has also been identified with a cheque made payable to
F. Kulunderino.5 The Bank of Nova Scotia certified cheque vouchers
provide a space for inserting either the cheque number or the name of
the payee. By matching of the "F. Kulunderino" cheques with the certi-
fied cheque vouchers and Morgan's letters of authorization to Barrett.
Goodfellow & Co. it is possible to make the following comparison:
Morgan
Letter
to Barrett
& Co.
Amount No.
F. Kulunderino Cheques
Date
Amount
1964
October 14 $ 35,000
October 26 25,000
November 5 25,000
November 12 25,000
November 19 25,000
November 27 25,000
December 8 25,000
1965
January 22 25,000
January 29 12,500
11
12
13
14
15
16
15
17
18
19
20
22
24
$222,500
1964
June 26 $ 45,000
October 14 35,000
October 26 25,000
November 5 ... 25,000
November 12 25.000
November 19 25.000
November 27 25,000
December 8 25,000
1965
January 8 10,000
January 15 25.000
January 22 25,000
January 29 27,500
February 5 12.500
February 1 2 42,400
$372,400
'Exhibit 2905.
■Exhibit 3841.10.
dM
Lucayan Beach and Dalite
The first of these cheques, unnumbered and dated June 26, 1964,
for $45,000 has already been referred to in Chapter VIII as one which
Kaftel denied receiving, and as a payment possibly made by or on behalf
of Allen Manus. It will also be recalled that, after $1,200,000 had been
paid on July 15, 1964 from the Lucayan Beach Hotel Company's ac-
count No. 10001 at British Mortgage & Trust Company to Daylite of
Grand Bahama, $150,000 remained to be paid, in accordance with the
altered terms of the agreement between Daylite of Grand Bahama and
the Lucayan Village Company,6 for the motel on Hong Kong Island.
Price, Waterhouse & Co. in the Bahamas supplied the Commission with
a photostatic copy of a cancelled cheque dated July 13, 1964, drawn on
this account by the Hotel Company and in favour of Daylite of Grand
Bahama, in the amount of $100,000 U.S. funds. Attached to it is a
requisition on the Bank of Montreal for the purchase of a draft in that
amount, converted into Canadian funds at $108,218.75.7 The particulars
endorsed upon the cheque are "re account to purchase 150 units" which
refers to the motel, and the ledger cards for the Bank of Nova Scotia
account No. 5160 show that a deposit in the amount of $108,218.75
was actually made. A further $50,000 in U.S. funds was either still
owing or had previously been paid. There is no single payment approxi-
mating this amount deposited in the Daylite of Grand Bahama accounts,
other than the $50,000 deposited in the Canadian funds account at
the Bank of Nova Scotia on June 26 out of which $45,000 was paid to
Kaftel. Here is one example, at least, of a payment made to Kaftel of
moneys belonging to Daylite of Grand Bahama, and not simply derived
from Morgan's brokerage account. If it is true that Allen Manus had
issued a valueless cheque to Kaftel and that the indebtedness was made
good by Morgan, there are grounds for believing that it was done at the
expense of Daylite of Grand Bahama and ultimately at the expense of
Atlantic Acceptance.
The remaining withdrawals by certified cheque from the Canadian
funds account, identified from the certified cheque vouchers, were as
follows:
Cheque No. Date Amount
3 July 15 $ 50,000.00
9 August 4 60,000.00
10 August 17 100,000.00
1964
July
August
August
1965
February
15
4
17
19
July
6
Total
25 February 19 15,890.00
F. Cockburn
in Trust July 6 6,222.18
$232,112.18
"Exhibit 2622 (v).
'Exhibit 3170.
662
Chapter DC
The last, made payable to F. Cockburn in trust, closed out the account
after Atlantic had gone into receivership. None of the cancelled cheques,
other than those payable to Kaftel, have been found, although the Bank
of Nova Scotia's documents relating to the Daylite of Grand Bahama
accounts contain an "authority to mail vouchers", dated January 28,
1964 and signed by E. Last, authorizing the bank to send him statements
of account, cheques and debit vouchers to 75 Brown's Line, Toronto 14,
the address of the Dalite Corporation.8 Last said in evidence that in spite
of this direction he never saw either statements or cheques, and main-
tained that these documents were turned over to Frank Cockburn in the
Commodore Sales Acceptance office and were afterwards kept in sealed
boxes at 75 Brown's Line. He further suggested that Harry Wagman
should have had the cancelled cheques for the Bank of Nova Scotia
accounts. He denied ever having heard the name Kulunderino and said
that Morgan had asked him and Wagman to sign several cheques in
blank and leave them with him, which is probably true. But there is
ample reason to believe that a great many documents stored in the Dalite
Corporation premises were destroyed by Last, or under his direction, in
the summer of 1965.
One of the transactions among the many investigated in connection
with the Daylite of Grand Bahama accounts at the Bank of Nova Scotia
should be referred to. On July 20, 1964 a deposit was made in account
No. 5160 of $108,000, the deposit slip showing two amounts of $50,000
with the notation "Comm". This was a payment of $100,000 in U.S.
funds for which British Mortgage & Trust had purchased drafts on the
Canadian Imperial Bank of Commerce, charging the amount to the
account of the Lucayan Beach Hotel Company. An examination of the
ledger card of the Hotel Company's account No. 1001 at British Mort-
gage shows a withdrawal sufficient to purchase three drafts, each for
$50,000 in U.S. funds, or a total of $162,203.12 in Canadian funds, as
indicated by a photostatic copy of the three drafts supplied by Price,
Waterhouse & Co.9 According to a letter written to Eugene Last by
D. J. Copperthwaite of Price, Waterhouse & Co.'s Freeport office on
December 23, 1964, the books of the Hotel Company showed $150,000
in U.S. funds as having been advanced to Daylite of Grand Bahama, al-
though a description of this transfer as a repayment might have been
more in order. Daylite of Grand Bahama, however, only received two of
the $50,000 payments, although the third draft is also payable to the
Bank of Nova Scotia and again in the amount of $50,000 U.S. funds.
At the time when Mr. Wolfman gave his evidence it was merely known
that the third draft had been negotiated in New York, but subsequent
inquiries produced a photostatic copy of a cheque for $50,000 from the
Lucayan Beach Hotel Company, signed by Allen Manus and payable to
"Exhibit 2918.
"Exhibit 3172.
663
Lucayan Beach and Dalite
Peter D. Graham. The accountants also forwarded photostatic copies of
statements of account sent by Graham to the Hotel Company for services
rendered in connection with the purchase of the Hotel property, and the
giving of a mortgage back to the Grand Bahama Development Company
for a total of $121,687.04, converted from sterling to U.S. dollars. This
statement shows $50,000 as having been paid on account on June 29,
1964. It is not clear why the Hotel Company should have shown the
whole $150,000 as having been paid to Daylite of Grand Bahama, or
why the money payable to Graham was paid to the Bank of Nova Scotia
and negotiated in New York, unless this was the means whereby an addi-
tional $50,C00 was credited to the Hotel Company at the expense of
Atlantic Acceptance. Graham was also the solicitor for Daylite of Grand
Bahama, but the payment to him was evidently made by and on behalf of
the Hotel Company. According to James E. Maher, the balance of
Graham's account was paid by the Grand Bahama Development Com-
pany which was represented by Sir Stafford Sands, and he said that this
was necessary because Graham was merely a straw man set up by Sands
to act on the other side of various transactions and give the appearance of
independence. Maher added to this statement his opinion that the very
large fees charged by Graham were shared with Sands. It is only proper
to say that there has been no opportunity to test the accuracy of this
statement, but the appearance of Graham as solicitor for both the
Lucayan Beach Hotel Company and Daylite of Grand Bahama, the
interests of which were bound to conflict, shows a complete disregard of
the accepted canons of professional conduct. As Morgan said, "our soli-
citors would not go against the Grand Bahama Development Company."
Morgan and Last Attempt a Final Settlement
By the spring of 1965, and in the face of the huge debt which had
been created, both Morgan and Last, for somewhat different reasons,
were anxious to part company. From Morgan's point of view there was no
possibility of settling accounts with Dalite Corporation without a success-
ful financing of the Lucayan Beach Hotel Company, and he continued to
seek a solution by way of mortgage, relying, as he said, upon Weinrott,
while lending an ear to Allen Manus's schemes for the marketing abroad
of 10,000,000 £1 shares. Last was determined to rid his company of
the burden of its debt to Commodore Sales Acceptance and to get some
cash in the process. He described in evidence a scheme for Hugo Oppen-
heim und Sohn to make a second appearance on the stage, take over the
assets of Daylite of Grand Bahama and relieve Dalite Corporation and
Last himself of all liability to Commodore Sales Acceptance, giving
Dalite Corporation in the result the sum of $1,091,000. Since this ar-
rangement involved the now familiar switch of Commodore Sales Accept-
ance indebtedness without any repayment being made, and the further
664
Chapter IX
advance by that company of $1,091,000, either to the Berlin bank or its
Canadian subsidiary Hugo Oppenheimbank (Canada) Limited, it is not
surprising that Last took the initiative. He produced before the Commis-
sion a number of documents drawn by Messrs. Roberts, Archibald, Sea-
gram & Cole, the Toronto solicitors of Dalite Corporation. The first was
a letter of intent, dated May 28, 1965, to establish the terms of an in-
tended agreement between Commodore Sales Acceptance, Dalite Cor-
poration and Eugene Last.1 It reads as follows:
BETWEEN:
"LETTER OF INTENT
COMMODORE SALE ACCEPTANCE LIMITED,
— and —
DALITE CORPORATION (CANADA)
LIMITED,
— and —
EUGENE LAST
The accounts between the parties will be settled as follows.
Commodore will :
1. discharge or arrange for discharge of all liabilities owed to it and
other associated companies, including Adelaide Investments Lim-
ited, Aurora Investments Limited and Hilltop Holdings Limited,
by Dalite and Last and will release all debentures and other
securities, and
2. arrange that a note for $1,000,000 with sufficient collateral will
be obtained from Mr. Alan Manus as evidence of his debt to Day-
lite of Grand Bahama Company Limited and the value of this
note will be provided by Commodore to Dalite as working capital.
Dalite will:
1 . assign and transfer to Commodore or as it may direct its accounts
receivable from Daylite Grand Bahama and subsidiary companies,
its shares of Daylite Grand Bahama and its shares of D.H.I.
Limited.
Last will :
1 . Forthwith upon the execution and delivery of the promissory note
above mentioned execute all necessary resignations for himself
and his nominees as officer and director of Daylite of Grand
Bahama Company Limited and Bahama Entertainment Company
Limited, San Jose Construction (Bahamas) Limited and The
Lucayan Marina Limited, and will assign the shares therein as
Commodore directs.
It is the intent that upon conclusion of these arrangements Daylite
will execute all conveyances, transfers and documents necessary to
'Exhibit 3201.
665
Lucayan Beach and Dalite
transfer to Lucayan Beach Hotel and Development Company Limited
the marina and one hundred and fifty apartments now erected adjacent
to the Lucayan Beach Hotel.
The parties agree that this letter of intent will be supplemented by a
formal agreement between the parties.
DALITE CORPORATION (CANADA) LIMITED
'E. Last'
PRESIDENT."
This letter was not signed by Commodore Sales Acceptance because, as
Last explained, Morgan agreed to it in principle and a draft agreement
embodying its terms was then produced.2 The draft agreement set out in
some detail the manner in which this letter of intent was to be imple-
mented, but, since it was never executed, its reproduction would be otiose.
It will suffice to say that the manner in which the note from Allen Manus
was to be discounted, at a figure not disclosed, required Commodore
Sales Acceptance to guarantee a bank loan to Dalite Corporation up to
the limit of the amount of discount settled upon, pending payment of the
note when it fell due. In the draft, dated June 3, 1965, the words "San
Jose Construction (Bahamas) Limited" were deleted from a provision
whereby Last would "execute all necessary resignations for himself and
cause to be executed such resignations for his nominees as officer or
director of Dalite of Grand Bahama Company Limited and its subsidiary
companies including Bahama Entertainment Company Limited ....
and The Lucayan Marina Limited, and will arrange for the assignment
of shares in such companies controlled by him or his nominees as Com-
modore may direct." Last said that he had obtained Morgan's agreement
to San Jose remaining as his ownproperty, but he went so far as to write
a letter to Bernard A. ThomsoiyGraham's associate in Nassau, enclos-
ing undated resignations of himself from Daylite of Grand Bahama,
Bahama Entertainment, San Jose Construction and the Lucayan Marina
Limited, together with 55,000 <£ 1 shares of Daylite of Grand Bahama
endorsed in blank, to be held in escrow until Thompson was advised by
Roberts, Archibald & Co. to release them to Hugo Oppenheimbank
(Canada).3 The period of escrow was to last for sixty days and to ter-
minate failing release by this means, and the letter is acknowledged at
its foot by Bernard A. Thompson.
This re- arrangement of the affairs of Commodore Sales Acceptance
and Dalite Corporation never materialized and, indeed, it had many im-
practical aspects; but, according to Last, negotiations proceeded up to the
eve of the collapse of Atlantic. Two practical results occurred. At some
point in May of 1965 C. P. Morgan, by the hand of one of his employees
according to Last, returned, with no written comment, the share certifi-
*Exhibit 3205.
•Exhibit 3204.
666
# flernarci A. Thompson
Chapter IX
cates for 1,507 common shares and 1,025 preference shares of Dalite
Corporation issued to Carl Solomon in trust on April 10, 1962, and rep-
resenting the 25% interest in Dalite Corporation stock given to him by
Last at that time. The certificates, which Last produced,4 are accom-
panied by a declaration of trust signed by Solomon, acknowledging his
position as trustee for C. Powell Morgan, and dated for an unspecified
day in May 1962, together with a covering letter from Solomon to Mor-
gan enclosing the declaration of trust and the certificates, concluding
"would you please put these Certificates in your safety deposit box or
some other place where they can be easily located." Last described Mor-
gan as saying that he was too busy with the Lucayan Beach development
to continue his participation in the affairs of Dalite Corporation. At the
same time, and apparently pursuant to an undertaking given to Morgan,
Last himself and members of his staff withdrew from Grand Bahama,
and Julian O'Reilly and his foreman took up their station in Miami,
turning over the operation of Daylite of Grand Bahama to Jack Tramiel
and Morgan's representatives on the spot. Last described this develop-
ment as a result of his first disagreement with Morgan. The breach was
temporarily healed, and he gave the following account of what transpired
at a critical point in the history of Atlantic Acceptance:5
"A. Daylite (Grand Bahama) had several smaller contracts under con-
struction, duplexes and so on, and they tried to run that business. What
transpired over there I would not know, but Mr. Morgan called me on
Saturday for a meeting on Sunday morning prior to Atlantic collapsing.
Q. How long prior?
A. One day.
Q. This would be Sunday, 13th June?
A. Right. He requested me to see if I could get my staff back on the
Island, because he has a problem with his own staff, for a short period
of time, until he gets proper personnel in proper places.
Q. When did he call you?
A. He called me on Saturday morning to arrange a meeting for Sunday
morning.
Q. Where did you meet?
A. At my office at 75 Brown's Line.
Q. Just yourself and Mr. Morgan?
A. Just myself and Mr. Morgan.
Q. Did Mr. Morgan state why he was dissatisfied?
A. No, he did not state why. He just stated he had problems, and right
in front of him I picked up the phone and I called Miami. I got hold of
♦Exhibit 3206.
"Evidence Volume 65, pp. 8778-85.
667
Lucayan Beach and Dalite
Julian O'Reilly. Julian could not believe that I asked him to go back to
the Island, so I let him even speak to Mr. Morgan, and finally I gave
him instructions to go back to the Island and get his staff back and take
control and run it until further notice.
Q. Why did not he believe that Mr. Morgan would want him back on
the Island?
A. Because the way Mr. Cockburn explained apparently to him.
Q. To Mr. O'Reilly?
A. To Mr. O'Reilly. He was running the whole show there with Mr.
Tramiel. He did not need anybody. He was completely surprised to
hear that.
Q. Now, when did this change in management staff of Daylite (Grand
Bahama) take place?
A. I would say about three or four weeks prior to that.
Q. About the last week in May then?
A. Yes.
Q. Now, up to this time nothing had been done by Commodore Sales
Acceptance; for example, they had not even signed any document, not
even a letter of intent, indicating that they were going to carry out the
discussions which you had with Mr. Morgan. Where did that trans-
action stand?
A. Well, at the same time when we had the meeting on Sunday, as a
matter of fact Mr. Morgan was away from the 3rd. I don't recall, but
I couldn't get hold of him. When he came back from New York on
Saturday and called me, or Friday night and he called me on Saturday,
at the same meeting on Sunday he went through the agreement and he
agreed in principle. He says, 'This is what we want; you get this in
final form and we will sign it on my return from New York'. He was
going to New York on Monday morning arranging the five million
short term loan what he stated he had arranged with Chase, and on
the execution of that he will come and sign the agreement; but he still
requested me to keep my staff on the Island for at least a month until
he found proper personnel for proper places.
Q. Now, he said he was going to New York the next day, for what
purpose?
A. To finalize the short term loan of five million from Chase.
Q. And by Chase, did you understand him to mean the Chase Man-
hattan Bank?
A. Yes.
Q. Did he express any concern as to whether or not he would be able
to arrange that?
A. He stated that he had arranged it on Friday, and he was going to
finalize it.
668
Chapter IX
Q. How long did he expect to be in New York?
A. He was .supposed to meet me in New York on Monday afternoon.
Q. And you were to go to New York, were you?
A. I was going to New York on some other matter pertaining to Dalite.
He was supposed to meet me in the afternoon. On Monday morning I
was with Mr. Thomson, one of my associates in New York.
THE COMMISSIONER: I am sorry. I did not hear that. You were
with Mr. Thomson?
A. James Thomson, one of my associates in New York, when we had
a phone call about Atlantic collapsing and also about the scandal of
fraudulent cheques and stock sales, orders for stock and so on, the
whole thing.
MR. SHEPHERD: Who called you about this?
A. One of the gentlemen that arranged a luncheon meeting with us for
arranging high finances for Dalite (Canada).
0. Who is that?
A. Jim Bender.
Q. B-e-n-d-e-r?
A. Right.
Q. What firm is he with?
A. I couldn't tell you right now. I don't recall.
Q. Is he an investment dealer?
A. No. He is an accountant for a number of banking groups.
Q. From whom did you hope to get the money?
A. We were arranging with the Rockefeller Foundation.
Q. You were dealing with Mr. Bender and Mr. Bender hoped to be
able to get the money which Dalite would require from the Rockefeller
Foundation, is that right?
A. That is right.
Q. That, I take it, did not go through?
A. Well, as a matter of fact, we had a luncheon meeting with Mr.
Bender on the arrangement and the principal from the "Rockefeller
Foundation, when we received a call. "Forget about luncheon, because
Atlantic just went down the drain'.
Q. Are you sure this would be on the Monday, or would it be on the
Tuesday?
A. No, it was on a Monday.
Q. Then when did you see Mr. Morgan again?
A. I saw him for a few minutes late in the afternoon.
669
Lucayan Beach and Dalite
Q. And where did you see him?
A. In New York, I believe in his hotel room.
Q. What was the conversation?
A. He just did not know what transpired. He did not know what to
do. He just said he did not know who started this fraudulent action
on the stock which hurt his arrangements.
Q. Do you refer now to the cheques which came in in respect of
Racan Photo-Copy and other companies, from the Bahamas?
A. Right.
Q. What did he say about that, please?
A. He said that hurt his arrangements for a loan, the people backed
away.
Q. Did he say how it hurt or in any way affected his arrangements?
A. Apparently, my understanding was from him, that at the time that
he was arranging that five million, not for Atlantic but for Commodore
Sales, and the minute the newspaper hit the street, the banks just did
not want to have anything to do with Commodore, even Commodore
Business Machines stock was involved, and a few others, which the
bank knew they were in the same group. This was the indication he
gave me.
Q. How long did this conversation, this meeting, last?
A. Oh, about an hour.
Q. What was the whole of the conversation?
A. Well, the whole of the thing was he was just walking around
worrying who would ever do that to him, because he felt that some-
body deliberately did that to him, by these fraudulent cheques.
Q. He was expressing the view that the act of signing the fraudulent
cheques and the orders to purchase shares, which proved ultimately
to come from a non-existent purchaser, was in some manner directed
at him?
A. Exactly.
Q. Did he say why he thought that those orders were intended to
injure him?
A. Well, if you could have seen him you would not ask the guy. I
mean, he was really worried about the whole thing, so there was not
much questions asked at all.
Q. He was upset?
A. Very, very badly.
Q. From his conversation was it evident that he had received notice
that the bank had returned a cheque for $5,000,000?
A. Right."
670
Chapter IX
As to the quality of the work done by Dalite Corporation and Day-
lite of Grand Bahama at Lucayan Beach time alone will tell. Like many
contractors, who started in a small v/ay immediately after the war, and
prospered in a time of scarcity when almost any kind of production was
profitable and quality was at a discount, Eugene Last had little idea of
costing and none of the internal control necessary to run a large busi-
ness in a prudent manner. That this must have been known to Morgan
and his close associates at the beginning of their dealings with Last is
clear from the existence of a report by H. K. Cooper, C.A. — the im-
presario of Crest Acceptance Limited — found in the 1962 audit file of
Walton, Wagman & Co. and dated February 16 in that year.6 This is
entitled "Dalite Corporation (Canada) Limited — Confidential Report
Re Contract Estimating and Costing Methods."
"A survey of the methods employed by the Company in determining
tender prices on pre-fab buildings for the Department of Northern
Affairs revealed the following points:
MATERIAL AND MECHANICAL:
Exact material quantities and costs were not known at the time the
tender was submitted. From the Government's specifications and the
Company's previous house plans (similar to the present specifications)
Mr. Hogg "took off" estimates of the material quantities required. Mr.
Hogg is sales manager of the Company, J)ut has been doing estimates
for various contracts. Prices for the material quantities estimated were
calculated according to the Company's experience with existing suppliers
plus obtaining some prices from others.
With the tender accepted by the Government, for $480,000.00 of the
projects total of $510,000.00, the Company's draftsman is now work-
ing out the exact material quantities required. Also, the Company is
now shopping for competitive prices on material and mechanical sup-
plies. This is being done not by one man but by three — Messrs. Last,
Goldberg and Hogg, — each covering a particular group of materials and
mechanical supplies. Results of this shopping have shown considerable
savings in prices as compared to the original estimated costs.
In future, it is planned for the draftsman to supply exactly quantities,
and for all prices to be obtained by Mr. Scriven who will also be
responsible for flow of production, materials into production and of
mechanical supplies into warehouse for shipment with completed
product.
LABOUR AND FACTORY BURDEN:
The labour cost involved in the production of the pre-fab panels and
handling of component mechanical parts is unknown. Not only to the
writer who has just entered the scene, but to the management who
have been handling the product for some time. Needless to say the fac-
tory burden and its apportionment is also a mystery."
•Exhibit 1716.2.
671
Lucayan Beach and Dalite
The report draws attention to a basic weakness in the Dalite organiza-
tion throughout its history, a failure not only to understand the prin-
ciples of management but to observe those of business morality. Many
illustrations of this obliquity have, in the course of this account, been
culled from the records of the operation on Grand Bahama, and once
the apparently inexhaustible financing of Commodore Sales Acceptance
had been secured to him, the ignorance, vanity and cupidity of Eugene
Last completely overshadowed his ability as a tradesman and promoter
of business. A substantial file of complaints back and forth between
Daylite of Grand Bahama and its sub-contractors was produced,7 but
there is no evidence that it was inordinately large, or revealed excessive
friction in view of the many enterprises undertaken. Lucaya Construc-
tion Company blamed Daylite of Grand Bahama for delays and errors
in supplying the prefabricated components of buildings manufactured by
Dalite Corporation in Toronto, and Daylite of Grand Bahama, through
the picturesque comments of its superintendent, Julian O'Reilly, in turn
blamed Lucaya Construction for delays and slipshod workmanship, par-
ticularly in the case of "native labour." On the whole, the experiment
with prefabricated buildings was a structural success in the favourable
climate of Grand Bahama Island and Last was proud of the speed of
construction, especially in the case of the 110 efficiency units.
The End of Dalite
When Atlantic Acceptance went into receivership and all his hopes
and schemes for Dalite lay in ashes, Eugene Last reacted as resolutely
as had Jack Tramiel in the case of Commodore Business Machines, and
quite predictably. Until August 10, when it was appointed receiver, the
Clarkson Company acted merely as agent of Commodore Sales Accept-
ance, the security of which, represented by debenture, was sufficient to
give it absolute control over the affairs of Dalite Corporation and to
exclude the claims of other creditors save Adelaide Acceptance. In writ-
ing to H. H. Robertson Company Limited of Hamilton on August 3, in
reply to an offer to purchase the Dalite operation, D. Gardner had the
following to say:1
"Our position is as agent for the secured creditor whose security
covers all of the assets by way of a floating charge debenture.
In this capacity we are, and have been for some time, negotiating
with the present operator, Mr. E. Last, under which he would buy our
security and take over the company including its operating assets and
other debts."
It is to be assumed that the writer at this point did not know his man,
because the breathing space provided between the end of June and
"Exhibit 3178.
'Exhibit 3923.
672
Chapter IX
August 10 enabled Last and his brothers, Michael and Victor, Lillian
Casselton and Samuel J. Hogg to dispose of some Dalite assets for the
benefit of a new company incorporated to carry on the Dalite business.
On August 12 letters patent were issued to a company called Lasco Pro-
ducts Limited, the first permanent directors of which were Samuel J.
Hogg and Victor Last who were joined in September by Lillian (Martin)
Casselton. The head office and premises of the new company were at
1017 Seneca Avenue, Lakeview, Port Credit, Ontario, at a convenient
but substantial distance from the Dalite plant on Brown's Line, and its
undertaking was expressed to be in particular the manufacture of lamin-
ated wood products. In November of 1965 supplementary letters patent
were granted to change the name of the company to Panfab Corporation
Limited.2
Between June 30 and August 5, 1965 Commodore Sales Accept-
ance advanced to Dalite Corporation $26,702.44 to enable it to stay in
business, and this sum was spent to defray the cost of salaries and wages,
telephone bills and other routine expenses.3 While these advances were
being made, it is quite clear, from the evidence given by Lillian Casselton,4
A. J. Meikleham and finally B. W. McLoughlin of Touche, Ross. Bailey
& Smart, who analysed the documentary evidence," that items of Dalite
inventory and accounts receivable upon which Commodore Sales Accept-
ance had a claim, by virtue of the floating charge and an assignment of
book debts, were being converted to uses which were not for the benefit
of Dalite, but for that of the Last group individually and through L;
Products. Since the earliest days of Dalite's corporate life scrap materials
had been sold "out the back door" and paid for in cash to Victor Last.
whose income was regularly supplemented in this way at the direction of
his brother Eugene. At least one scrap dealer. Mendel Apelowicz,
mer employee of Dalite Corporation carrying on his business in Willow-
dale, Ontario, testified to this practice.'" A transaction of sonic magnitude
was described in evidence by Victor Last, and by Jack Mamann, carry-
ing on the business of buying and selling "distress merchandise*' in To-
ronto under the names o^ Mamann Brothers and Continental Jobbers.
Mamann made contact with Dalite Corporation through Arthur B.
Drohan. During the months o\' July and August. 1965, and commencing
specifically on July 28, Mamann paid Dalite $24,500 in cash — cash in
this case being currency -for aluminum, stainless steel and "styrofoam"
insulation material, which in some cases had been part of its inv«
for over a year. Only one receipt was discovered in the rudimei
of Continental Jobbers at 2S0 College Street, signed b\ \ ictor 1 .
"Exhibit 3994.
"Exhibit 3928.
'Evidence Volume 96
5Evidence Volume 97,
"I \ idence Volume 97.
673
Lucayan Beach and Dalite
$4,000,7 and it is probable that this amount was all that found its way
into the company's bank accounts. In any event, no accounting was given
of this transaction to Commodore Sales Acceptance and the Clarkson
Company. Mr. McLoughlin also produced in evidence a number of in-
voices and bills of lading as evidence of shipments by Lasco Products.
Two examples of transactions illustrated by these, with matching pur-
chase orders, may suffice. On June 3, 1965 the W. S. Tyler Company of
Canada Limited, of St. Catharines, Ontario, ordered two sets of "Formica-
faced wainscots" at a price of $307.10 per set, free on board that com-
pany's plant.8 These were shipped on August 3 according to the records
of the carrier, Mc Anally Freight-Ways, from Dalite Corporation, 75
Brown's Line, Toronto,9 and on August 11 the W. S. Tyler Company
was billed in the amount of $614.20, less a 2% discount, on an invoice
with the heading "Dalite Corporation (Canada) Ltd." scored out and
the words "Lasco Products Limited, 1017 Seneca Avenue, Lakeview,
Port Credit, Ontario" superimposed. The words "in inventory" are
stamped on the face of the invoice10 and by cheque dated September 15
the W. S. Tyler Company paid the amount of the invoice to Lasco Pro-
ducts Limited.11 A further refinement of impropriety may be found in
the fact that Lasco Products Limited dated the invoice one day before
the date of its own incorporation. The second example involves a pur-
chase order of George Rathbone Lumber Company Limited of Toronto,
directed to Dalite Corporation (Canada) Limited at 75 Brown's Line
and dated July 16, requiring delivery of arborite table tops as specified.12
These were delivered by Finch Transport13 on August 3. By another
altered invoice, dated August 1 1 , the George Rathbone Company was
billed in the amount of $104.7214 and payment was made to Lasco
Products Limited by a cheque dated September 28 in that amount.15
The total amount thus diverted into the coffers of Lasco Products can-
not be reliably estimated and is perhaps insignificant as a loss to Com-
modore Sales Acceptance, but, as an example of the business morality of
Eugene Last and his employees, deserves to be mentioned. When, on
August 20, an auction of the inventory of Dalite Corporation was con-
ducted by Maynard's, auctioneers employed by the receiver to sell equip-
ment and inventory, finished goods and goods in process, it produced
some $92,000 net, and might well have produced more had not these
irregular and dishonest transactions intervened. The petition of Com-
modore Sales Acceptance Limited was filed on July 15, 1965, the
7Exhibit 3949.
"Exhibit 3943.
•Exhibit 3944.
"Exhibit 3945.
"Exhibit 3946.
12Exhibit 3937.
"Exhibit 3938.
"Exhibit 3939.
"Exhibit 3940.
674
Chapter IX
receiving order was made on August 31 and the Clarkson Company
Limited was appointed trustee. A statement of affairs dated September
1416 showed amongst the assets accounts receivable stated to be $7,336,-
756.35, of which amount $18,516.47 was regarded as good, $7,035,-
261.79 as doubtful and $282,978.09 as bad. On the list of creditors
those secured are shown as only Commodore Sales Acceptance Limited
claiming $4,473,885.66 and Adelaide Acceptance Limited $126,184.65.
All of the accounts receivable from Daylite of Grand Bahama, shown as
amounting to $6,726,357, were classified as doubtful. By July 31, 1967,
or approximately tv/o years after Dalite Corporation had been declared
bankrupt, the trustee had realized from the accounts receivable the sum
of $86,436.52. An interim statement of receipts and disbursements for
the period August 11, 1965 to July 31, 1967 has been supplied to the
Commission by the trustee and is as follows:
Receipts
Proceeds of auction sale $92,364.37
Collection of accounts receivable 86,436.52
Interest on deposit receipts 9,417.13
Cash surrender value of insurance 7,045 .49
Workmen's Compensation refunds 1,965.92 $197,229.43
Disbursements
Rent payments 10,956.48
Legal expenses 500.00
Moving and storage 342.40
Travel expenses 241.88
Telephone 217.37
Bankruptcy expenses 459.01
Hydro 66.02
Insurance 55.71
Bank charges 39.40 $ 12.878.27
Excess of receipts over disbursements $ 1 84.351 . 1 6
Interim distribution
Commodore Sales Acceptance Limited $135,000.00
Adelaide Acceptance Limited 15.000.00
$150,000.00
A special resolution passed at an extraordinary general meeting of the
shareholders of Daylite of Grand Bahama, held on July 22. 1965 and
confirmed on August 6, approved the voluntary winding up of the com-
pany and the appointment of Mr. Biddell of Clarkson's as liquidator.17
To what extent C. P. Morgan was in measurable distance of getting
rid of both Eugene Last and Allen Manus in the spring of 1905 must
'•Exhibit 2917.
"Exhibit 4957.
675
Lucayan Beach and Dalite
remain a matter of speculation, but there is no doubt about his intention
to do so. The concluding words of his testimony to the Commission
before entering hospital should be reproduced. They came as a result
of questions put by Mr. Shepherd as to why he had relied on Eugene
Last for so long and given him such a free rein.18
"A. I was in this kind of a position, Mr. Shepherd, that this was 1,600
miles or 1,800 miles away from here and my visits were what I would
call or classify as infrequent, and Last used to, as you can tell from
his travelling expenses, he used to travel extensively, and I sent
Cockbura down there to check out all the vouchers and check the
on-site transactions. I sent Saunders down there to verify the existence
— and kept him down there — to verify the existence of the payroll,
starting with the construction down there, and, generally, I had some-
body on top of Last at all times with regard to the expenditure of
money, but he was a great man for getting invoices.
Just in passing, he transported his boat from here down to the
Bahamas. He was able to get it air-conditioned and fixed up and some-
how got it charged into the construction of the Marina, with the
assistance of certain, I would say, corporations in the U.S. who don't
care what they say on their invoices as long as they get paid.
And these charges were picked up by Cockburn later in the analysis
of the costs.
There is no question about it that he not only milked the company
from the point of view of an abnormal number of dollars in travelling
expenses but he no doubt had other irons in the fire because he was
making continual trips to Panama and South America, and went prac-
tically every day from Freeport to Nassau and lived in Miami at the
Miami Airport Hotel, and generally — and then in addition created two
assets down there, one of which I was able to get back, which was the
Drivers' Club and the other asset was this San Jose Construction Com-
pany, out of the costs of the buildings and equipment which were being
charged to the Hotel company.
So Manus had a very legitimate beef about the costs which were
charged with regard to the Marina to the motel units when all of this
was going on underneath the surface.
Q. Did one of your servants sent down charged with the responsibility
of examining all these invoices of Dalite report to you that Mr. Last
had his yacht air-conditioned by a firm called Ribovich in Florida,
which, at least as it was reported to you, issued two invoices which
aggregated the sum of $11,000 approximately for plumbing which was
then paid by Dalite Grand Bahamas?
A. And charged to the Marina. That is what I just finished saying.
Q. Yes. When you learned that I was struck by the fact that you did
not take any action with respect to Last?
A. I took action to try to nail the yacht as far as Last was concerned
and he took it off the Island. He was very elusive.
"Evidence Volume 26, pp. 3520-4.
676
Chapter IX
By this time, by the time I got most of this information, Atlantic had
gone or was about to go up the flue and I didn't have a chance.
Q. Were you ever at any time subjected to any unreasonable degree of
pressure from Mr. Last to continue enabling him to finance his various
ventures?
A. No, never at any time.
Q. Well then, the account you have given of the Lucayan Beach
venture, does it consist in essence of this, that you assert you went
into it in the first place thinking that for a comparatively modest
expenditure of money, if $250,000 can be said to be modest, that you
would find a suitable climate and a suitable area in which the prefabri-
cated houses of Dalite might be used to advantage and that thereafter,
by reason of the events which you have described, you were slowly
and almost imperceptibly pulled deeper into the mire, sort of step
by step, meaning to protect that which had gone before?
A. There is no question about it, that I was just pulled right into it,
and it got down to the point where it represented a major item as far
as Atlantic was concerned.
If I had got the $900,000 in the form of mortgage money —
Q. The $9,000,000?
A. The $9,000,000, I am sorry, in the form of mortgage money, which
Mr. Weinrott had indicated was coming, this would have, in my
opinion, enabled Atlantic to have passed the crisis.
However, it did not come. But I am so sure in my own mind that for
every dollar that was put in there every penny plus could be got out
of it because it is that good an investment. That is not anything which
I can have any pride in but it is just the fact that I felt all along as I
went along that regardless of the thievery that went on in the complex,
that this was only chicken feed compared to the value of the invest-
ment that was being created.
For that reason when it came down to the 1 1th hour and the shares
which represented the control of this enterprise were given by me at
their original cost to the Trust Company, so that they could control
the enterprise, I feel that that is an important thing in the ability of
Atlantic to have got control of 90-odd per cent of this company, and I
feel they will get every nickel that has been invested in it plus the
usual regular interest out of it."
The final observation may still produce painful echoes in the ears of
officers of the Montreal Trust Company. Only in 1967 has the operat-
ing company under contract to Lucayan Beach Hotel and Development
Limited shown signs of making a profit. The hotel itself remains as the
most considerable of the unrealized assets of Atlantic Acceptance. The
prospects for its disposal at a figure which will recover for Atlantic the
very large sums of money expended through its subsidiaries by way of
loans to and investment in the Hotel Company, both before and after
677
Lucayan Beach and Dalite
the date of its receivership, is the one great imponderable in estimating
the extent of Atlantic's loss. Both Dalite Corporation and Day lite of
Grand Bahama are involved in the result, and the state of the accounts
among them cannot be resolved until that result is known. None of the
receivables collected by the trustee of Dalite Corporation include any
amounts owing to it by Daylite of Grand Bahama.
An "Inappropriate Venture"
My narrative of the relevant events and transactions of Morgan's
gamble in the Bahama Islands is thus concluded on an inconclusive note.
It was, as Mr. Haxton of the Montreal Trust Company said, a quite
inappropriate venture for a company engaged in the acceptance finance
business, and it was pursued at every step by improper means. Although
Morgan described his attendances on Grand Bahama Island and in
Nassau as infrequent, the amount of time which he devoted to the
Bahamian problem diverted his attention at a critical time from the
development of Atlantic's profitable small loans business which was
the main hope for permanent recovery. The last throw of the dice was
to retrieve all the losses created by years of imprudence and impropriety,
and the measure of his desperation may be discerned in his reliance
upon men of the calibre of Manus, Last, Thomson, Timmins and Wein-
rott to produce a feasible financial solution. For the rest, the climate of
the Bahamas for investment and development does not at this stage
appear to be as salubrious as its geographical counterpart. A combina-
tion of licensed gambling and immunity from income tax is bound to
attract the type of enterprise which tarnishes by association the repu-
tation of any legitimate undertaking. The well-known motto which
appears under the coat-of-arms of the colony — "Expulsis piratis com-
mercia restituta" — has a mocking sound under present conditions, and
the sober investor, as well as the regulatory authorities whose business
is to inform and protect him, must take into account the fact that the
pirates are still much in evidence on these islands, and have penetrated
into every corner of their life and polity.
119
5-0
678
BINDSNG SECT. MAY 12 1970
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